HomeMy Public PortalAboutExhibit RC 78- Pamela Lemoine Rebuttal Testimony1
Exhibit No:
Issue: Stormwater and Wastewater
Rate Change Proceeding
Witness: Pamela Lemoine
Type of Exhibit: Rebuttal Testimony
Sponsoring Party: Rate Commission
Date Testimony Prepared: May 12, 2023
Table of Contents
Witness Background and Experience ............................................................................................ 2
Findings and Recommendations .................................................................................................... 4
General Matters .............................................................................................................................. 6
Wastewater Rate Proposal ............................................................................................................. 9
Lashly & Baer, P.C.
714 Locust Street
St. Louis, Missouri 63101
Exhibit RC78
2
WITNESS BACKGROUND AND EXPERIENCE 1
Q1. Please state your name and business address. 2
A. My name is Ms. Pamela Lemoine. My business address is 425 Woods Mill Road, Suite 3
300, Chesterfield, Missouri 63017. 4
Q2. By whom are you employed, and in what capacity? 5
A. I am a Senior Project Manager with 1898 & Co., a part of Burns & McDonnell Engineering 6
Company, Inc. 7
Q3. Please describe the firm of 1898 & Co. and Burns & McDonnell Engineering 8
Company, Inc. 9
A. Burns & McDonnell Engineering Company, Inc. is a global family of companies offering 10
a broad range of integrated services to multiple industries, including the water and 11
wastewater industry. Burns & McDonnell has been providing water and wastewater 12
services to the public sector and industrial clients since its founding in 1898. 1898 & Co. 13
is the management consulting group within Burns & McDonnell Engineering Company, 14
providing business technology and security solutions across multiple industries, including 15
the water and wastewater industry. 16
Q4. Please summarize your educational background and professional experience. 17
A. I received a Bachelor of Science in General Engineering from the University of Illinois – 18
Urbana/Champaign in 1986. I am a registered professional engineer in the state of 19
Washington. Since 1987, I have served in an increasing role, providing a broad range of 20
strategic financial analyses and studies to clients in the water and wastewater industry. I 21
joined Black & Veatch in 1987 as an analyst in Black & Veatch’s Management Services 22
Division in Kansas City, Missouri. In 1989, I was hired by R. W. Beck and Associates in 23
3
Seattle, Washington, as a project manager in R. W. Beck’s Seattle Consulting office. In 1
1995, I rejoined Black & Veatch, serving as Northwest Regional Manager of the 2
Management Consulting Division. In 2002 I relocated to St. Louis, Missouri, serving as a 3
Consulting Manager and later Principal Consultant in Black & Veatch Management 4
Consulting, LLC. In February 2023, I joined Burns & McDonnell Engineering Company, 5
Inc.’s 1898 & Co. as a Senior Project Manager. In this role, I serve as a project manager 6
for strategic financial planning, cost of service and rate design studies, program/facility 7
feasibility studies, and financial capability analyses and affordability assessments 8
associated with long-term control plan development required as a result of federal consent 9
decrees. I have assisted utilities in developing strategies to address affordability in 10
negotiations with state and federal regulators. 11
In the past decade, I have been involved in studies regarding water, wastewater and 12
stormwater rates and related matters for clients including Springfield, Missouri; St. Louis 13
Water Division, Missouri; WSSC Water, Maryland; Metropolitan Sewer District of Greater 14
Cincinnati, Ohio; Elyria, Ohio; Cleveland Heights, Ohio; Wilmington, Delaware; Citizens 15
Energy Group, Wastewater Utility, Indianapolis, Indiana; Louisville MSD, Kentucky; SD1 16
of Northern Kentucky; Greater Cincinnati Water Works, Ohio; Cincinnati Stormwater 17
Management Utility, Ohio; and DC Water. 18
Q5. Have you previously testified before the Rate Commission of the Metropolitan St. 19
Louis Sewer District (District)? 20
A. Yes, I testified on behalf of Black & Veatch Management Consulting, LLC as the 21
consultant to the Rate Commission for the 2015 Wastewater/Stormwater Rate Change 22
4
Proposal, the 2018 Stormwater Rate Change Proposal, and the 2019 Wastewater Rate 1
Change Proposal. 2
Q6. Please describe your role in this proceeding. 3
A. I am a subconsultant to Black & Veatch Management Consulting, LLC, and will refer to 4
my role in this proceeding as being part of the Black & Veatch Team. The scope of my 5
assignment as a subconsultant is to assist the Rate Commission in gaining an understanding 6
of the District’s Wastewater and Stormwater Rate Change Proposal (Rate Proposal), assist 7
Black & Veatch in the evaluation of the Rate Proposal and past rate change proposals, to 8
provide insights to the Rate Commission on industry accepted cost of service and rate 9
setting financial best practices and methodologies and trends related to wastewater utility 10
ratemaking, to assist the Rate Commission’s legal counsel in the examination of witnesses, 11
and to prepare testimony and exhibits setting forth the Black & Veatch Team ’s findings 12
and recommendations regarding the Rate Proposal. 13
The scope of my assignment is limited to relying on the record in this proceeding, 14
statements, data, information, and reports provided by the District and any intervenors and 15
their respective consultants and advisors, as well as data and information available in the 16
public domain. I also rely on my over 36 years of experience conducting financial planning, 17
cost-of-service, and rate design studies in the wastewater industry. 18
FINDINGS AND RECOMMENDATIONS 19
Q7. Please summarize your findings and recommendations to the Rate Commission in this 20
proceeding. 21
A. The following is a summary of the Black & Veatch Team’s findings and recommendations 22
to the Rate Commission in this proceeding. 23
5
1. We concur with and support the District’s Rate Proposal to seek authorization from 1
voters within the District to issue additional bonds to finance a portion of the CIRP 2
during the period Fiscal Year (FY) 2025 through FY 2028, as it provides multiple 3
benefits including mitigating the impact on user rates, aligning the repayment of 4
debt with the long-term useful life of the assets, and enabling future ratepayers of 5
the system to contribute to the debt service. 6
2. The District’s proposed capital financing plan, which includes approximately 35% 7
cash funding of the CIRP, is consistent with similar financial best practices used by 8
other peer wastewater utilities and provides a reasonable mix of cash and debt 9
financing. 10
3. We concur with the District’s approach in their proposal to establish a financial 11
plan that allows for debt service coverage of 2.5 times or greater for senior lien 12
bonds and 1.8 times or greater for total debt coverage. 13
4. We find that the Operating & Maintenance (O&M) escalation factors and debt 14
financing assumptions used in the projection of annual O&M expenditures and debt 15
service, respectively, are reasonable. 16
5. We find from our review of the cash flow and debt service coverage analyses 17
presented in the District’s Rate Proposal that the series of annual revenue 18
adjustments, which the District is seeking, will provide funds necessary to: (i) pay 19
the annual principal and interest on both the outstanding debt and the additional 20
annual debt projected in the proposal; (ii) meet the annual O&M expenditures; and 21
(iii) provide for reasonable levels of debt service coverage and the minimum levels 22
of annual O&M reserves. 23
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6. Surcharge rates are projected to increase substantially in FY 2025 primarily due to 1
cost-of-service adjustments and then increase on an “across-the-board basis” 2
annually based on the overall wastewater revenue increase for FY 2026 through FY 3
2028. To mitigate any potential “rate shock” on Surcharge customers, the District 4
should consider phasing towards cost-of-service rates over at least a two-year 5
period. 6
7. Based on the results of the Infiltration and Inflow (I&I) Allocation Study the 7
District commissioned, the District’s policy of allocating I&I based on 40% to the 8
Customer component and 60% to the Volume component appears reasonable. 9
GENERAL MATTERS 10
Q8. What is the role of the Rate Commission in this proceeding? 11
A. Pursuant to Section 7.040 of the Charter Plan of the District, the role of the Rate 12
Commission is to review and make recommendations to the District’s Board of Trustees 13
regarding the proposed changes in wastewater charges, stormwater charges or tax rate rates 14
necessary to pay: (i) interest and principal due on bonds issued or to be issued to finance 15
assets of the District; (ii) the cost of operation and maintenance; and (iii) such other 16
amounts as may be required to cover emergencies and anticipated delinquencies. 17
Q9. Upon what criteria must the Rate Commission base its recommendation? 18
A. In accordance with Section 7.270 of the Charter Plan of the District, any proposed rate 19
change, and all portions thereof, recommended by the Rate Commission must: 20
(1) be consistent with constitutional, statutory, or common law as amended from time 21
to time. 22
7
(2) enhance the District’s ability to provide sewer and drainage systems, facilities, or 1
related services. 2
(3) be consistent with and not in violation of any covenant or provision relating to any 3
outstanding bonds or indebtedness of the District. 4
(4) not impair the ability of the District to comply with applicable Federal or State laws 5
or regulations as amended from time to time. 6
(5) consider the financial impact on all classes of ratepayers in determining a fair and 7
reasonable burden. 8
Q10. How should the Rate Commission determine if the District’s Rate Proposal is 9
consistent with constitutional, statutory, or common law as amended from time to 10
time? 11
A. The Rate Commission should evaluate Charter Plan authority, environmental improvement 12
agency regulations, constitutional and statutory provisions, and applicable case law. 13
Q11. How should the Rate Commission determine whether the District’s Rate Proposal 14
enhances the District’s ability to provide sewer and drainage systems and facilities or 15
related services? 16
A. The Rate Commission should consider the record in this proceeding, including the 17
District’s Rate Proposal and related exhibits as well as the testimony of its staff and any 18
intervenors, to determine if the District’s proposal enhances its ability to provide adequate 19
sewer and drainage systems and facilities, or related services. 20
Q12. How should the Rate Commission determine if the District’s Rate Proposal is 21
consistent with and not in violation of any covenant or provision relating to any 22
outstanding bonds or indebtedness of the District? 23
8
A. Such a determination requires an analysis of the record in this proceeding, including the 1
covenants or provisions contained in the resolutions or ordinances and bond documents or 2
other documents issuing any such obligations. The Rate Commission can determine that 3
this condition is met by examining the District’s Rate Proposal as well as the testimony of 4
its staff. 5
Q13. How should the Rate Commission determine whether the District’s Rate Proposal 6
impairs the ability of the District to comply with applicable Federal and State laws or 7
regulations as amended from time to time? 8
A. The Rate Commission should consider the record in this proceeding, including the 9
testimony provided by District staff and others, including any intervenors, to determine 10
whether the District’s Rate Proposal impairs the ability of the District to comply with 11
applicable Federal or State laws or regulations. This is accomplished by evaluating the 12
District’s Rate Proposal to determine whether the proposed rates are projected to provide 13
the District with sufficient revenues to operate the utility in compliance with applicable 14
Federal or State laws or regulations and to provide sufficient revenue to allow the 15
completion of capital projects necessary to meet Consent Decree obligations while 16
maintaining current assets. 17
Q14. How should the Commission determine if the District’s Rate Proposal considers the 18
financial impact on all classes of ratepayers in determining a fair and reasonable 19
burden? 20
A. The Rate Commission should determine whether the District’s Rate Proposal considers the 21
financial impact on all classes of ratepayers in determining a fair and reasonable burden by 22
considering the record in this proceeding, including the District’s submittal and the 23
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testimony of its staff and any intervenors, and evaluating to the extent feasible the District’s 1
use of reasonable allocation factors to apportion costs among cost-causative components, 2
aligned with industry-accepted practices and guidelines. 3
WASTEWATER RATE PROPOSAL 4
Q15. Does the District’s projection of costs, allocation of costs, and the overall Rate 5
Proposal reflect the use of industry-accepted cost of service and rate design principles 6
to develop fair and equitable rates for customer classes? 7
A. The District’s projected costs to provide wastewater service and complete anticipated 8
capital projects required under the Consent Decree over the Rate Proposal period appear to 9
be reasonable and are projected to provide the District with adequate funding to maintain 10
the financial health of the utility. Overall, in its cost-of-service analysis, the District 11
performed its cost allocations and calculated proposed wastewater rates based on cost -of-12
service principles that are commonly used in the industry, as outlined in the Water 13
Environment Federation’s Manual of Practice No. 27, “Financing and Charges for 14
Wastewater Systems.” However, there are a few topics, as outlined in my testimony, that 15
could enhance the District’s Rate Proposal. 16
Q16. Does the District’s proposal consider the financial impact on all classes of ratepayers 17
in determining a fair and reasonable burden? 18
A. Yes. The District’s financial plan reflects reasonable revenue requirement projections and 19
provides for revenue sufficiency and adequate fund balances. The financial plan provides 20
for revenue stability, which is necessary to allow the District to deliver necessary services, 21
meet regulatory requirements, and avoid violation of bond covenants. The District has 22
testified (See Ex. MSD 75, pgs. 54-56) that several customer impact data were considered 23
10
in developing their Rate Proposal, including the appropriate cash/debt mix for CIRP 1
financing to manage the cost to customers and spread costs to customers benefiting from 2
the projects, and evaluating data such as non-metered customer attribute data and 3
infiltration and inflow data to appropriately allocate costs to customer classes. However, 4
the District’s Rate Proposal reflects rates based strictly on the cost of service. Some of the 5
additional factors that should be considered include the mitigation of future rate volatility 6
and potential “rate shock” when a cost-of-service analysis indicates a significant impact on 7
one or more customer classes. As stated in Question 13, this testimony includes further 8
discussion of the District’s Rate Proposal and recommendations for better reflecting these 9
considerations. 10
Capital Improvement and Replacement Program and Capital Financing 11
Q17. How much has the District proposed to be expended on wastewater capital 12
improvements in its Rate Proposal? 13
A. The District states that there will be $1.65 billion (See Ex. MSD 1, p. 4-16, Table 4-7) in 14
total Capital Improvement and Replacement Program (CIRP) needs and $23.9 million (See 15
Ex. MSD 1, p. 4-24, Table 4-10) in routine capital improvements for the wastewater system 16
for the period FY 2025 through FY 2028. In addition, the District anticipates significant 17
additional capital improvements beyond FY 2028 to comply with the requirements set forth 18
in the District’s Consent Decree with the United States Environmental Protection Agency 19
(US EPA). Based on the testimony of District staff and consultants during the First 20
Technical Conference, the timing and magnitude of the expenditures necessary to comply 21
with these regulations have been agreed to in the Consent Decree with the US EPA, which 22
became effective on April 27, 2012, and was amended on June 22, 2018. Projected total 23
11
CIRP needs for FY 2029 through FY 2032, as outlined in the District ’s Rate Model (See 1
Ex. MSD 60, Tab “CIRP’, line 107), is expected to be an additional $1.69 billion, with 2
additional capital spending under the Consent Decree remaining after FY 2032. 3
Q18. How much has the District spent to date on the Consent Decree, and how much is 4
estimated to remain to be spent in FY 2025 through FY 2028 and beyond FY 2028? 5
A. Through FY 2024, the District plans to have expenditures (appropriations) of 6
$3,054,290,580 and expects to spend an additional $4,084,624,000 (2023 dollars) (See Ex. 7
MSD 73A, p. 9). 8
Q19. Based on your experience with other large wastewater utilities, do you have an 9
opinion regarding the reasonableness of the District’s CIRP? 10
A. The Black & Veatch Team, collectively, has provided financial planning and rate studies 11
for several large wastewater systems that are facing significant capital expenditures to 12
comply with consent decrees regarding sanitary sewer overflows (SSOs) and/or combined 13
sewer overflows (CSOs) and have reviewed the consent decrees of numerous others. It is 14
important to note that the long-term control plans and associated capital projects required 15
to address individual consent decrees vary depending upon the specific circumstances of 16
each utility. Therefore, there is no way to draw direct comparisons between utilities. That 17
said, generally speaking, based upon information provided by the District, the CIRP and 18
the District’s long-term control plan appear consistent with that agreed to by other major 19
wastewater systems throughout the United States. 20
Q20. How has the District Proposed to fund the Wastewater CIRP? 21
A. The District plans to fund the CIRP from a combination of sources, including senior 22
revenue bonds, Missouri SRF loans, WIFIA loans, wastewater user charge revenues 23
12
(PAYGO), grants, interest income and available fund balances. For the period FY 2025 1
through FY 2028, the District proposes to issue $507.4 million (par value) of new revenue 2
bonds, $133.1 million of new State Revolving Fund (SRF) loans and a planned Water 3
Infrastructure Finance and Innovation Act (WIFIA) loan of $278 million in FY 2025. In 4
addition, the District forecasts receiving $3 million from grants and contributions. (See Ex. 5
MSD 3H, p. 11, ll. 4-10). 6
Q21. May the District issue long-term indebtedness to finance capital improvements? 7
A. The District has the authority to issue debt under Section 3.020(13) of its Charter Plan. The 8
Charter Plan requires that general obligation bonds may not be issued without voter 9
approval required by Article VI, Section 26(b) of the Constitution of Missouri. Section 10
7.170 of the District’s Charter Plan requires the approval of a simple majority of the voters 11
of the District to issue revenue bonds. Most recently, in April 2021, the District received 12
approval from voters to issue $500 million in debt to finance capital improvement projects. 13
Prior to that, the District received approval from voters on four separate occasions to issue 14
debt to finance capital improvements projects, as follows: April 2016 ($900 million), June 15
2012 ($945 million), August 2008 ($275 million) and February 2004 ($500 million). 16
Q22. Does the District’s capital financing plan proposed for its CIRP reflect a reasonable 17
and cost-effective approach? 18
A. Yes, the District’s proposed issuance of revenue bonds and state revolving fund loans to 19
finance a substantial portion of the CIRP is a sound capital financing approach. The District 20
was also able to further access low-cost capital financing by pursuing and securing a highly 21
competitive WIFIA loan for wastewater improvements. Financing the CIRP from a mix of 22
long-term debt and cash financing (PAYGO) is reasonable and helps spread the cost of 23
13
improvements over a longer term, allowing future customers receiving the benefit of the 1
improvements to help pay for the improvements. In addition, bond rating agencies 2
favorably view a meaningful balancing of debt financing and cash financing of a utility’s 3
capital program. The District’s current Rate Proposal provides for cash financing of 4
approximately $584 million between FY 2025 through FY 2028 (See Ex. MSD 1, p. 4-18), 5
which is approximately 40% of total funding for the CIRP for FY 2025 through FY 2028. 6
The projected cash financing exceeds the District’s historical cash versus debt funding mix 7
of 30% / 70% and meets the District’s desired funding mix of 40% / 60%. (See Ex. MSD 8
3I, p. 4, ll. 11-12). This level of cash financing is consistent with the 25% to 30% cash 9
financing of capital that is deemed an industry accepted best practice and is in practice at 10
other peer utilities. The District’s proposed financing plan, assuming that voters authorize 11
the District to issue additional bonds, will help minimize the impact of the CIRP on 12
wastewater rates during the projected four-year planning period. 13
Q23. How will the District finance the CIRP if the voters fail to approve the issuance of 14
additional revenue bonds? 15
A. If the District fails to obtain voter authorization for issuance of additional revenue bonds, 16
the only debt financing possible will be through a small amount of authorization remaining 17
from the prior voter authorization. Therefore, the District would have to cash finance most 18
of the CIRP during the period FY 2025 through FY 2028 as set forth in Section 7 of the 19
District’s Rate Proposal (See Ex. MSD 1, p. 7-2, Table 7-1). This would cause rates to 20
increase substantially to provide sufficient revenues to cash finance the CIRP. 21
Q24. Do you have any concerns about the District’s proposed financing plan for the CIRP? 22
14
A. The District’s Rate Proposal requires substantial additional debt to be incurred over a short 1
period of time, with the issuance of new debt in FY 2025 through FY 2028 and beyond in 2
order to continue to fund the projects required by the Consent Decree. While the District’s 3
proposal provides for debt service coverage well above the minimum required by the 4
District’s bond covenants, the District’s proposal indicates projected debt service coverage 5
declining to the District’s minimum policy level for All Debt of 1.80x by FY 2026. While 6
still strong, the District has stated in its Rate Proposal (See Ex. MSD 1, Section 4.8, p. 4-7
25), that “the rating agencies have all noted that the District’s current credit rating could 8
be compromised if projected debt service coverage narrowed or fell below targeted levels.” 9
Given that the Rate Proposal results in debt service coverage reaching the District’s 10
minimum policy levels by FY 2026, any unforeseen impact to revenue generation and/or 11
expenditures relative to the assumptions used in the development of the Rate Proposal 12
could pose a risk of coverage levels dropping lower than the District’s minimum policy 13
level. 14
This is an even greater concern given the District’s Rate Proposal includes an assumption 15
that the District will obtain approval for a two-year delay in completion of projects in the 16
latter part of the Consent Decree project schedule. Mr. Unverferth, in his testimony at the 17
Technical Conference for Direct Testimony, stated that the delayed projects are for a CSO 18
tunnel along River Des Peres (See Ex. MSD 75, p. 25, ll. 11-25). Mr. Unverferth indicated 19
that the delay in the CSO tunnel project would still allow the District to meet the overall 20
Consent Decree completion date of 2039. As stated in Mr. Gee’s testimony at the Technical 21
Conference for Direct Testimony, FY 2028 is the only year that is impacted by the timing 22
of the CSO tunnel project. He stated that the delay allows the revenue increase in FY 2028 23
15
to be approximately one percent lower than without delay. He further stated i f the District 1
is not successful in receiving authorization for the delay, the District would not make a 2
request for a revised or additional rate increase in FY 2028, but rather the District would 3
manage expenses with available revenues. If this occurs, th ere could be a risk that debt 4
service coverage could be reduced compared to that projected in the Rate Proposal, and/or 5
rate increases in FY 2029 through FY 2032 would need to be higher than the planning level 6
estimates the District has calculated in the Rate Model. 7
Q25. What do you suggest the District should do to address the issues you raise regarding 8
the District’s CIRP Financing Plan? 9
A. As the District is required, under the Consent Decree, to complete the projects within the 10
schedule outlined in the Consent Decree while managing assets for long-term resiliency, 11
there is little the District can do, in the short run, to minimize the total spending and pace 12
of annual expenditures for the CIRP. The District has incorporated into this Rate Proposal 13
a two-year delay in the construction of a CSO tunnel along River Des Peres to mitigate the 14
impact on rates of the significant Fluidized Bed Incinerator (FBI) project, which is a project 15
required to meet regulatory requirements. If approved by the US EPA, This will allow the 16
District to reduce the impact of adding this new regulatory-required project into the CIRP 17
while the District continues to address requirements under the Consent Decree. If the 18
District is not successful in obtaining approval for the two-year delay, the District will need 19
to manage finances carefully in FY 2028 to meet desired fund balances and debt service 20
coverage and propose higher revenue increases in the next rate proposal. 21
22
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Wastewater Revenues 1
Q26. As part of your review of the District’s Rate Proposal, did you analyze the District’s 2
projection of revenues? 3
A. Yes. The District has projected a modest increase in customer accounts for the Single-4
Family Residential customer class (0.3%/year), no change to the Multi-Family Residential 5
customer class, and a slight decrease in the Non-Residential customer class (-0.2%/year). 6
The District has stated that the projected growth rates are based on historical trends for 7
billed accounts for the years FY 2018 to FY 2022 (See Ex. MSD 1, p. 4-3). 8
Q27. As part of your review of the District Rate Proposal, did you analyze the District’s 9
projection of contributed wastewater volume? 10
A. Yes. The projection of contributed and billed wastewater volume is an integral component 11
of the wastewater rate-setting process. The District charges its customers based on metered 12
water consumption for most customers within the District’s service area. Residential 13
customers outside the City of St. Louis are billed based on a Winter Quarter Average, 14
which is the average actual consumption for a 90-92-day period between November and 15
March of the preceding winter period (See Ex. MSD 1, Section 4.3, p. 4-5). This is a 16
common practice in wastewater rate setting, as it reflects the amount of wastewater entering 17
the District’s system and avoids including outdoor water usage during summer months. 18
Residential customers within the City of St. Louis generally do not have meters and are 19
therefore billed on the basis of Fixture Units (i.e., number of rooms, water closets, baths, 20
and separate showers). Unmetered customers comprise approximately 19% of residential 21
customers and 18% of all customers served by the District. 22
17
The District has stated that it has projected total volume by customer class based on a 1
review of historical annual billed volumes for FY 2018 through FY 2022. Based upon their 2
review, the Rate Proposal reflects a projected decline in Single Family metered volume of 3
-1.8%/year for FY 2024 through FY 2026, and -1.9%/year for FY 2027 through FY2028. 4
The District has projected a decline in contributed volume for Multi-family customers of -5
0.5%/year for years FY 2025 through FY 2028, and a decrease in Non-Residential 6
contributed volume of -4.9% in FY 2024, -1.4%/year in FY 2025-2026, and -1.5%/year in 7
FY 2027-2028. 8
Q28. Based on your experience, do you have an opinion regarding the District’s forecast of 9
contributed wastewater volume? 10
A. Yes. The District’s projection of contributed wastewater volume (See Ex. MSD 71B), treats 11
the number of accounts and projected volume as independent variables. In other words, 12
there does not seem to be any relationship between the change in the number of accounts 13
by class and the projected volumes for each class. Suppose that the number of commercial 14
accounts increases over the projected period. Under that scenario, the volume would likely 15
also increase. However, as currently projected, the impact of more customers does not 16
result in a change in consumption. The disconnect between reflecting potential changes in 17
customer patterns (change in processes, demographics, etc.) is clearest when looking at the 18
Non-Residential projections, as shown in Figure 1. Therefore, we believe that the District 19
should consider projecting future volumes using an average volume/bill approach. Such an 20
approach would create a stronger nexus between growth/decline in customer accounts and 21
projected volumes. Using the data provided in Ex. MSD 71B (metered volume with FY 21 22
removed), the volume/bill shows a steady decrease. In fact, by the end of the rate period, 23
18
FY 2028, the volume/bill drops to 4.04 for Single-Family, 15.08 for Multi-Family, and 1
51.76 for Non-Residential. By 2032, the downward trend continues, and the volume/bill 2
drops to 3.69 for Single-Family, 14.53 for Multi-Family, and 41.65 for Non-Residential To 3
put this into context, in FY 2022, the volume/bill was 4.52 (Single-Family), 15.80 (Multi-4
Family), and 62.94 (Non-Residential). In the absence of context, it is hard to believe that 5
the District would see this level of decrease, particularly for the Non-Residential accounts. 6
7
Figure 1: Historical and Projected Customer Class Volume/Bill 8
Q29. What adjustments to volume assigned to fixture units/attributes did the District make 9
in projecting volume for non-metered customers? 10
A. The District undertook an evaluation of volume contribution from the District’s unmetered 11
customers, updating an analysis previously conducted for the 2015 Rate Change Proposal 12
(See Ex. MSD 65). The study evaluated billing, demographic, and parcel data to correlate 13
billed volume for metered customers with attributes for those customers and apply the 14
usage characteristics of metered customers to unmetered customers. While the 15
demographics between the City, with the majority of unmetered residential customers, and 16
the County, with the majority of metered residential customers, differ (as shown on pages 17
2017 2018 2019 2020 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032
SFR Volume/Bill 4.97 4.85 4.78 4.60 4.46 4.52 4.40 4.31 4.22 4.13 4.04 3.95 3.86 3.78 3.69
MFR Volume/Bill 16.17 16.69 16.19 15.82 16.06 15.80 15.62 15.48 15.35 15.21 15.08 14.94 14.81 14.67 14.54
NR Volume/Bill 74.92 74.30 73.21 69.78 67.84 62.94 71.90 59.25 56.76 54.27 51.76 49.25 46.73 44.19 41.65
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
Customer Class Volume/Bill
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8-9 of Ex. MSD 65), given the lack of metered data for the City, the overall approach for 1
assigning volume to attributes seems reasonable. The results of the study indicate a 2
reduction in assigned volumes to each of the District’s attributes used to determine 3
unmetered rates. 4
Q30. What is the District projecting for extra strength surcharge loadings (tons)? 5
A. Figure 2 provides the projected change in surcharge loadings for the projection period. 6
7
Figure 2: Projected Change in Surcharge Loadings 8
The projected decline in extra strength surcharge loadings results in a decrease in revenue 9
under existing rates for surcharge revenues. As stated in the District’s Rate Proposal, page 10
4-8, the District states that there are several reasons for a projected decrease in revenues 11
under existing rates, including “projected fluctuations in excess strength WW revenue due 12
to more extensive pre-treatment programs.” 13
Figure 3 illustrates the historical and projected change in extra strength surcharge loadings 14
through FY 2032, based on data in the District’s Rate Model (See Ex. MSD 60, tab 15
“Demand”). Figure 4 illustrates the resulting historical and projected surcharge units (tons) 16
through FY 2028. The District states in Ex. MSD 73A, p. 11, that surcharge loadings were 17
projected based on an analysis of historical loadings. Surcharge loadings are very 18
dependent upon the makeup of the surcharge customers, including size, processes, 19
contributed strength, and projection of loadings requires an understanding of why changes 20
in loadings have occurred in past years, as well as any known changes in the surcharge 21
FY 2024 FY 2025 FY 2026 FY 2027 FY 2028
Forecast Forecast Forecast Forecast Forecast
Extra Strength Loadings
TSS -6.20%-6.60%-7.10%-7.60%-8.30%
BOD/COD Eq.-6.20%-6.60%-7.10%-7.60%-8.30%
20
customer base (i.e., any that are leaving, known new customers coming online, changes in 1
processes, etc.). 2
It is unclear how the District determined an increasing rate of decline in surcharge loadings 3
over the rate period of FY 2025 through FY 2028 and beyond. It is important to better 4
understand how the District derived the projected demands and the factors that would 5
support an increasing rate of decline over the rate period and beyond (e.g., expected decline 6
in surcharge customers, increasing regulations to further limit discharge of loadings to the 7
District, changes in large surcharge customer processes, etc.). All these factors impact not 8
only surcharge revenue under existing rates, but also units of service for TSS, BOD, and 9
COD, resulting in an increasingly higher unit cost, which is the basis for the District ’s 10
surcharge rates. 11
12
Figure 3: Extra Strength Loadings - % Change over Prior Year 13
-25.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
FY
2019
FY
2020
FY
2021
FY
2022
FY
2023
FY
2024
FY
2025
FY
2026
FY
2027
FY
2028
FY
2029
FY
2030
FY
2031
FY
2032
Extra Strength Loadings -% Change over Prior Year
TSS BOD COD
21
1
Figure 4: Historical and Projected Change in Surcharge Loadings 2
Wastewater Revenue Requirements 3
Q31. Did you examine the District’s proposed O&M expense escalation factors? 4
A. Yes. The District has utilized a series of cost escalation factors in the Rate Model (See Ex. 5
MSD 60) as described in Section 8.1.1 of the District’s Rate Proposal (See Ex. MSD 1, 6
beginning p. 8-2). The District’s projections are based on “The Budget and Economic 7
Outlook: 2022 to 2032” published by the Congressional Budget Office of the Congress of 8
the United States (CBO), as discussed in Appendix 8.1.1, beginning page 8-2 of the Rate 9
Proposal. The CBO report utilized in the District analysis was published in May 2022 and 10
recognized the CBO’s analysis of then current and projected conditions. As shown in 11
Appendix 8.1.1, the District is using the Core PCE Price Index (excluding food and energy) 12
for most non-personnel cost categories, and based on that index, has incorporated an 13
escalation factor of 2.1% in years FY 2025 and beyond. Overall, the escalation factors used 14
appear to be reasonable. However, one area of some concern is the near-term impact of 15
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028
To
n
s
Historical and Projected Extra Strength Loadings
TSS BOD COD
22
inflation and supply chain issues that have resulted in substantially increased costs for 1
certain materials and supplies (e.g., chemicals, etc.). The District has assumed in the Rate 2
Model a higher escalation factor of 4.4% for FY 2024, versus the long-term escalation 3
factor of 2.1%. This higher escalation rate is appropriate given current conditions. 4
However, the CBO’s more recent updated report1 (dated February 2023) indicates higher 5
inflation rates in the near term than previously forecasted and shown in the District ’s 6
analysis for FY 2024. 7
Another area of concern is using the Core PCE Price Index for most non-personnel costs. 8
This index is perhaps not the best index to use for costs influenced by market pricing, such 9
as chemicals, energy, etc. The PCE does include both inputs and outputs in its derivation. 10
However, the District, like most utilities, are not typical consumers of commodity items 11
such as chemicals. Moreover, the District may or may not experience lower chemical costs 12
given that producers do not have to pass on decreases in their costs to buyers. The District 13
should evaluate using the Producer Price Index (PPI) or other similar indices that explicitly 14
track costs for these categories, particularly in light of the significant volatility in recent 15
years. 16
As the District establishes a multi-year rate schedule, it is important to carefully select cost 17
escalation factors to reflect not only current conditions but anticipated future conditions as 18
well. The District’s assumptions recognize the near-term conditions as well as long-term 19
projections; however, the assumptions for cost escalation for some materials and supplies 20
in the Rate Model may be less conservative than what may have been used if the analysis 21
1 Analysis of CBO’s February 2023 Budget and Economic Outlook | Committee for a Responsible Federal Budget
(crfb.org)
23
were to be conducted at this time. Therefore, it is our opinion that the cost escalation factors 1
are not overstated and could be understated for certain costs. If the District experiences 2
inflation on certain costs that are above and beyond those assumed in the Rate Proposal, 3
the District would be required to either reduce other costs to accommodate the increased 4
costs or draw from fund balances to provide sufficient funding for all costs. 5
Q32. What impact will the District’s Stormwater Proposal have on the Wastewater Utility 6
and this Rate Proposal? 7
A. In the Stormwater Rate Proposal, the District is proposing a Stormwater Capital Charge to 8
provide funding for erosion and flood control capital projects throughout the service area. 9
Because such funding is unrelated to the wastewater utility, the District’s Stormwater Rate 10
Proposal will have no impact on the Wastewater Utility or the Wastewater Rate Proposal. 11
Q33. Did you consider the appropriateness of the District’s debt service coverage policy? 12
A. Yes. The District’s policy to maintain senior debt service coverage (DSC) of 2.5 times or 13
greater and total debt service coverage of 1.8 times or greater is a valid and important 14
metric, particularly in light of the District’s current and anticipated future heavy debt 15
profile. The District’s DSC policy is consistent with rating agency expectations. 16
Rating agencies consider strong debt service coverage important for a highly rated utility. 17
S&P Global Ratings (See Ex. MSD 51) notes that their rating reflects “historical and 18
projected extremely strong all-in DSC….” S&P Global Ratings further states that “our 19
expectation is that management will diligently monitor rates on an annual basis to ensure 20
coverage levels do not fall below targeted levels….” Moody’s Investor Service (See Ex. 21
MSD 52) likewise notes that one of the District’s credit strengths is “healthy liquidity and 22
24
debt service coverage.” One of the factors they have listed as a factor that could lead to a 1
downgrade is a “narrowed liquidity or debt service coverage.” 2
Q34. Will the proposed revenue increases outlined in the District’s Rate Proposal help 3
achieve adequate fund balances for the District during the Rate Proposal period? 4
A. Yes. Available cash balances are a very important element of a wastewater utility’s 5
financial plan. Adequate fund balances are necessary to ensure adequate working capital 6
and funds for unanticipated events. Figure 4-5 of the District’s Rate Proposal (See Ex. MSD 7
1, p. 4-21) presents the District’s forecasted Operating Reserve. As shown, the District 8
projects the Wastewater Operating Reserve will be at or above the District’s policy level 9
of 60 days of O&M in all years of the projection period. Table 4 -10, pgs. 4-24, further 10
indicates in line 22 that the ending balance in the Operating Reserve will decrease to $40.8 11
million in FY 2027 and then increasing slightly to $41.3 million in FY 2028. An operating 12
reserve of 60 days is consistent with the targets of other wastewater utilities and rating 13
agency expectations and provides the District with adequate working capital to provide for 14
unanticipated expenditures or emergencies. 15
Wastewater Cost of Service / Rates 16
Q35. How did the District reflect Infiltration and Inflow (I&I) in the cost-of-service 17
analysis? 18
A. The District calculated I&I volume by subtracting annual contributed volume from 19
customers from the total annual measured plant flow. Identifying this diffe rence as I&I is 20
consistent with industry-accepted practice. The District has calculated I&I as 62% of total 21
wastewater flow. 22
Q36. How did the District allocate I&I to customers? 23
25
A. The District allocated I&I to customer classes based on two components: Customer and 1
Volume. Historically, the District has allocated I&I on the basis of 40% to the Customer 2
component and 60% to the Volume component. In last Rate Commission proceedings, the 3
Rate Commission recommended that the District undertake a study to determine whether 4
the District’s allocation basis is appropriate. The District engaged the services of Stantec 5
Consulting Services, Inc. to conduct an Infiltration and Inflow Cost Allocation Study (See 6
Ex. MSD 66). Based on the results of that study, Stantec recommended that the District 7
maintain the existing allocation of 40% to Customer and 60% to Volume. 8
Q37. Based on the results of the Infiltration and Inflow Cost Allocation Study, do you 9
believe the District’s allocation of I&I is appropriate? 10
A. The Stantec report included a broad range of approaches for allocating I&I between the 11
Customer and Volume components. The approaches resulted in allocations ranging from 12
0% to the Customer component to 70% to the Customer component. While not all utilities 13
develop an allocation methodology based on an analysis of the system, for those that do, 14
certain of the approaches Stantec identified are more common than others, which are based 15
on a distribution of the gravity sewers within the MSD system. Of those approaches, the 16
District’s allocation of 40% to Customer and 60% to volume falls within the range of those 17
approaches. As such, I believe the allocation approach used by the District is reasonable. 18
Q38. In the District’s Rate Proposal, Surcharge rates are projected to increase in FY 2025 19
at a level substantially higher than the system-wide increase of 7.5%. What are the 20
primary drivers for such significant increases? 21
A. Mr. Beckley testified (See Ex. MSD 3K, p. 8, ll. 20-21) that the “cost of service analysis 22
indicates a significant increase in surcharge rates for BOD, COD, and TSS.” Figure 5 23
26
presents a summary of the resulting increases. The District is proposing a 105.0% increase 1
in the surcharge rate for suspended solids, and a 17.9% increase in the surcharge rates for 2
BOD and COD, based on the cost-of-service study the District conducted. These increases 3
are higher than the system-wide increase of 7.5% for FY 2025. 4
5
Figure 5 - Proposed Surcharge Rates – Increase over Prior Year 6
The following drivers contribute to the resulting increases to surcharge rates. 7
The District proposes to implement FY 2025 rates based on the allocated cost of service 8
for FY 2025. Because the last cost of service adjustment was implemented after the 9
previous rate proceedings, for FY 2021, the divergence between cost recovery under 10
the implemented rates compared to the cost of service can result in a larger or smaller 11
increase in specific rate components compared to existing rates. For surcharge rates, 12
the increase is larger than the system-wide increase. 13
As previously discussed in Question 31, the District is projecting a decline in surcharge 14
loadings (tons) in each year of the projection period. Because such declines are 15
projected from FY 2022 levels, the result is significantly fewer units of service from 16
surcharge customers than in the prior cost-of-service analysis. This results in fewer 17
units of service upon which to recover costs allocated to BOD and TSS, which results 18
in a higher unit cost that becomes the extra strength surcharge rate(s). 19
In Ex. MSD 3K, p. 8, ll. 21-22, Mr. Beckley states that the increase in surcharge rates 20
“is caused by associated costs increasing at a greater than average rate, in part because 21
FY 2025 FY 2026 FY 2027 FY 2028
Proposed Proposed Proposed Proposed
Suspended Solids over 300 mg/l 105.0%7.5%7.5%6.5%
Biochemical Oxygen Demand over 300 mg/l 17.9%7.5%7.5%6.5%
Chemical Oxygen Demand over 600 mg/l 17.9%7.5%7.5%6.5%
System-wide Revenue Increase 7.5%7.5%7.5%6.5%
27
of the new incinerator plant.” CIRP projects that are designed to address TSS, BOD, 1
and COD and therefore allocated to the TSS, BOD, and COD cost components will 2
cause a disproportionate impact on surcharge rates compared to other rate components, 3
in order to recover such costs on a cost-of-service basis. 4
Q39. How does the District propose to recover the system-wide revenue increase from rates 5
in FY 2026 through 2028?? 6
A. The District proposes to increase all rate components by the system-wide revenue increase 7
(“across-the-board” increase) in FY 2026 through FY 2028. 8
Q40. Is the District’s proposed approach to increasing surcharge rates different than in 9
past rate proceedings? 10
A. Yes. In past proceedings, the District has increased surcharge rates based on cost-of-service 11
in the first year of the rate period and increased rates by a projected annual average increase 12
in total O&M in years two through four. Because a significant portion of the District’s 13
budget reflects capital cost, this has contributed to the surcharge rates “falling behind” cost-14
of-service and contributed to the larger increase required in year one of the subsequent rate 15
period. In this Rate Proposal, the District is projecting surcharge rates to increase at the 16
system-wide revenue increase in years two through four, which will more completely 17
reflect the District’s increasing revenue requirements in future surcharge rates and help 18
mitigate the impact of adjusting for cost-of-service in the first year of the next rate period. 19
Q41. Do you have any concerns about the District’s proposed surcharge rates? 20
A. Due to the increase in all surcharge rates compared to the system -wide revenue increase, 21
but most specifically the significant increase in TSS of 105% of the existing rate, the 22
District should strongly consider “phasing-in” the surcharge rates over at least a two-year 23
28
period. Phasing-in the increases, at least for TSS, would mitigate potential “rate shock” 1
that could accelerate industrial customers to additional pre-treatment or other operational 2
changes that would reduce the District’s revenues further. Such a phase-in would require 3
the District to adjust other rate components, including the Base Charges, Volume Charges, 4
and Compliance Charges, to provide full revenue recovery. 5
Failure of Voter Authorization of Additional Revenue Bonds? 6
Q42. What is your recommendation if the District’s voters do not authorize the issuance of 7
additional revenue bonds? 8
A. If the voters reject the District’s request for authority to issue additional debt, the District’s 9
Rate Plan outlined in Section 7 of the District’s Rate Proposal (See Ex. MSD 1), which 10
includes rates that are higher than those included in the District’s recommended rates, 11
should be adopted by the Board of Trustees. 12
Q43. Are the matters contained herein true, correct, and complete to the best of your 13
knowledge and belief? 14
A. Yes. 15
Q44. Does this conclude your testimony? 16
A. Yes. 17
29
Respectfully submitted,
/s/ Brian J. Malone
Lisa O. Stump
Brian J. Malone
LASHLY & BAER, P.C.
714 Locust Street
St. Louis, Missouri 63101
Tel: (314) 621-2939
Fax: (314) 621-6844
lostump@lashlybaer.com
bmalone@lashlybaer.com
CERTIFICATE OF SERVICE
The undersigned certifies that a copy of the foregoing was sent by electronic transmission
to Stephanie DeJarnette, Office Associate Senior, Metropolitan St. Louis Sewer District; Susan
Myers, Counsel for the Metropolitan St. Louis Sewer District, on this 12th day of May, 2023.
Ms. Stephanie DeJarnette
Office Associate Senior
Metropolitan St. Louis Sewer District
2350 Market Street
St. Louis, MO 63103
sdejarnette@stlmsd.com
Ms. Susan Myers
General Counsel
Metropolitan St. Louis Sewer District
2350 Market Street
St. Louis, MO 63103
smyers@stlmsd.com
/s/ Brian J. Malone
Brian J. Malone