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HomeMy WebLinkAboutReso 111-1992 RESOLUTION NO. 111-92 CITY COUNCIL, CITY OF SOUTH SAN FRANCISCO, STATE OF CALIFORNIA A RESOLUTION REVISING SCAVENGER RATES AND CHARGES WHEREAS, the City has entered into an Agreement for the Collection and Disposal of Solid Waste Refuse in the City of South San Francisco with the South San Francisco Scavenger Company which provides for the adjustment of rates and charges; and WHEREAS, the South San Francisco Scavenger Company has presented financial information supporting the adjustment of rates as provided in said Agreement; and WHEREAS, the City has conducted a review of this information to establish the necessity of an adjustment of the rates and charges; and WHEREAS, on August 12, 1992, the City Council of the City of South San Francisco held a public hearing as required by Municipal Code Section $.16.440A revising scavenger rates and charges; and WHEREAS, after all evidence presented at the public hearing the City Council finds that it is reasonable to revise the rates to reflect the operating costs of the Scavenger Company. NOW THEREFORE, BE IT RESOLVED by the City Council of the City of South San Francisco as follows: 1. The revised Scavenger rates and charges shown on Exhibit "A" which is attached hereto and incorporated herein are hereby approved. 2. Said revised rates shall be retroactive to July 1, 1992. 3. The City Manager is directed to meet with the Scavenger Company concerning the implementation of the recommendations contained in the Hilton, Farnkopf & Hobson analysis of the subject rate request. (Exhibit "B") The City Manager is further directed to report back to the City Council within sixty (60) days with the results of such meetings. I kereby certify that the foregoing Resolution was regularly introduced and adopted by the City Council of the City of South San Francisco at a reqular meeting held on the 12th day of August , 1992 by the following vote. AYES: Councilmembers Jack Drago, Teglia, Robert Yee, and Mayor ,lnhn R. P~nna NOES: None ABSTAIN: N0ne ABSENT: None 2 Resolution No. 111-92 Exhibit A CITY OF SOUTH SAN FRANCISCO Proposed Fees For Refuse Service, Effective July 1, 1992 Residential Can Service (Per Month) A. First Can Up to 2e Gallons (Senior Citizen) Up to 30 Gallons 31 to 40 Gallons 41 to 50 Gallons 55 Gallon Drum B. Additional Cans Up to 30 Gallons 31 to 4¢ Gallons 41 to 50 Gallons 55 Gallon Drum Commercial Can Service Up to 3C Gallons 31 to 40 Gallons 41 to 5C Gallons 55 Gallon Drum Commercial Compactor Service Per Cubic Yard Debris Box Service, Residential and Commercial Temporary/One Time Use 5 Yard Mini-box 7 Yard 14 Yard 20 Yard 30 Yard Permanent Commercial Use 7 Yard 14 Yard 20 Yard 30 Yard Rental Charge (per day, over 7 days) Overweiqht Charge Content weight in excess of 3 tons, per ton Current Adjusted Rate Rate 6.45 7.88 8.03 9.81 8.92 10.90 10.24 12.51 11.95 14.60 3.91 4.78 4.36 5.33 5.02 6.13 5.87 7.17 8.40 10.26 9.69 11.84 10.99 13.43 12.43 15.19 17.04 20.82 63.19 77.22 138.08 168.73 138.08 168.73 188.01 229.75 271.22 331.43 116.49 142.35 116.49 142.35 166.42 203.37 249.63 305.05 5.20 6.35 32.53 39.75 Resolution No. 111-92 Exhibit A Commercial 5in Service A. Regular Pick-Up 1 - Yard Container 2 - Yard (Front End Loader Bin) 3 - Yard (Front End Loader Bin) 4 - Yard (Front End Loader Bin) 5 - Yard (Front End Loader Bin) 6 - Yard (Front End Loader Bin) B. On call Pick-Up, Per Yard Per Pick-Up, Per Yard Plus Container Rental Per Month Rental charges: 1 Yard Container 2 Yard Container 3 Yard Container 4 Yard Container 5 Yard Container 6 Yard Container 58.28 71.22 72.11 88.12 108.18 132.20 144.23 176.25 180.29 220.31 216.34 264.37 8.33 10.18 12.95 15.82 14.05 17.17 15.09 18.44 16.19 19.78 18.34 22.41 19.45 23.77 EXHIBIT B RESOLUTION No. 111-92 FINAL REPORT SOUTH SAN FRANCISCO SOLID WASTE COLLECTION AND RECYCLING RATE REVIEW August 5, 1992 This final report is printed on recycled paper and copied on both sides to reduce waste. HILTON FARNKOPF & HOBSON HILTON FARNKOPF & HOBSON Advisory Services to Municipal Management 39350 Civic Center Drive, Suite 100 Fremont, California 94538-2331 Telephone: 510/713-3270 Fax: 510/713-3294 August 5, 1992 Ms. Amy Margolis Director of Finance City of Sot, th San Francisco City Hall Annex 315 Maple Avenue South San Francisco, CA 94083 Final Report City of South San Francisco Solid Waste Collection and Recycling Rate Review Dear Ms. Margolis: Hilton Farnkopf and Hobson (HF&H) is pleased to submit this final report of our review of South San Francisco Scavenger Company's (Company) solid waste collec- tion and recycling rate application for fiscal years ending October 31, 1990, through 1992 on behalf of the City of South San Francisco (City). The Company's rate application seeks a rate increase of 30.4% effective November 1, 1991. This report documents the Company's application. Based on our findings and discussions with City staff, we recommend that the City increase rates by 22.2% effective July 1, 1992. We look fo, ward to presenting our findings at the August 12, 1992, City Council meeting. -f you should have any questions prior to the meeting, please call me or Troy Garner at 510/713-3270. Very truly yours, Robert D. --Iilton, CMC Managing Partner recycled FINAL REPORT SOUTH SAN FRANCISCO SOLID WASTE COLI,ECTION AND RECYCLING RATE REVIEW TABLE OF CONTENTS Section I H HI V Description Executive Summary Description of the Company and Its Affiliates Scope of Review Recommendations Background Franchise Agreement Company Description The Company's Rate Application Projection Methodology 1992 Revenue Requirement Review of the Company's Rate Application Scope of Review Limitation of Review Findings Adjusted Rate Increase Recommendations 1 1 1 2 3 3 3 5 7 7 9 9 10 10 17 18 Appendix I' Appendix II South San Francisco Scavenger Company Rate Application HF&H Engagement Letter SECTION I E~CUTIVE SUMMARY This repo~ doc,~ments the results of our review of the Company's solid waste col- lection an~. recycling rate application, submitted to the City in February, 1992, and subsequently mmended in May, 1992, requesting a 30.4% rate increase retroactive to November 1, 1991. This application is.the first submittal under the City's Solid Waste Collection and Recycling Franchise Agreement (Agreement) with the Company, signed in July, 1990. I~escrii~tion of the Comnanv and Its Affiliate~ The Company provides solid waste collection and recycling services to the cities of South San Francisco, Millbrae, and Brisbane. Company operations within the City represent the majority of service, as over 60% of the Company's customers are City rate payers. The Company's twelve shareholders also own and operate Royal Salvage Company (RSC) and Blue Line Transfer (BLT). RSC provides solid waste collection and recy- cling services to customers at the San Francisco International Airport. BLT receives waste from both the Company and from RSC, performs recyclable sorting operations, and transfers the remaining solid waste to Ox Mountain Landfill. The Compimy is a lessor of equipment from both RSC and BLT, although the majority of the leases are with RSC. The Company has leased equipment to RSC in the past. In addition, all current capital requirements in excess of available working capital are met through loans from both BLT and RSC. Scone of Review Our review was performed based on procedures described in the Agreement and on procedures agreed to between the City and HF&H, as described in Section IV. The scope of ou: review included reviewing the results of operations for the 12-month periods ending October 31, 1990, and 1991, and the projected results of operations for the 12-month period ending October 31, 1992. Actual results of operations will usually differ from projections because events and circumstances frequently do not occur as expected, and the difference may be significant. Our review was substantially different in scope than mn examinmtion in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. During our review, we found that the Agreement language, by itself, was not specific enough to provide sufficient guidance in resolving issues related to officer compensation, profit sharing, and the commencement date of the contract for rate purposes. _-n these cases, we relied solely on the interpretation of the Agreement as provided by City staff. Reeomn~ndations Based on our review, we recommend that: 1) The City increase garbage rates by 22.2%, effective July 1, 1992. 2) The City require the Company to prepare a rate application for the three year period ending October 31, 1995. This rate application should be submitted by February 28, 1993, and reviewed by July 1, 1993, with rates effective November 1, 1993 through October 31, 1995. 3) The C'ty monitor the Company's capital position and ensure that related party financing is reasonable. As rate increases are approved by the City, the Company should reduce its debt. Further, the Company should consider refinancing its debt that incurs a 10% interest rate. 4) The Company obtain City approval before entering any new lease agreements, or extensions or modifications to current lease agreements. The Company should provide support for the necessity of the lease (vs. purchasing) and detail the computation of the lease payment. 5) The Company allocate labor costs in accordance with the agreement in all future rate applications. 2 SECTION II - RACKGROUNF} Franchise Ao'reement In July, 1990, the City entered a 10-year agreement with the Company for the exclusive franchise to collect remove and dispose of ~11 solid waste matter accumu- lated in the City on residential, commercial, and industrial property. The Agreemenz also incorporates the City's curbside recycling services agreement with the Comps_ny dated July 20, 1989. The Agreement contains specific instructions with regard to the Company's rate application and the City's review (refer to Section IV). This year's rate application and review are the first submittal and review under the Agreement. The Agreement provides that, generally, rates are not to be adjusted more frequently than once every two years. Exceptions to the every two-year period result from disposal fee increases due to State government action, or when a rate increase of more than 7% is necessary. Also, the Agreement provides that the surplus or deficit in any previous year (based on actual revenues, allowed expenses, and profit based on the 90% opera~ing ratio) shall be included in the revenue requirement in the future year for which rates are being set. ConlDanv DescriDtion The Company provides solid waste collection services to residential, commercial, and debris box customers in the cities of South San Francisco, Millbrae, and Brisbane. In additior_, the Company provides residential curbside recycling services to residents of the three cities. Rate Payers The Company services approximately 19,600 residential and 2,700 commercial cus- tomers within the three city area. City residents and businesses represent the majority o_-' the Company's customers: 13,284 residential customers and 1,990 commercial customers. Table I compares the City's rate payers to those of the other cities pro~_ded service by the Company. Table 1 South San Francisco Scavenger Company Rate Payers by City City South San Francisco Millbrae Brisbane Residential Commercial Total Rate Payers Rate Payers Rate Payers 13,284 68% 1,990 74% 15,274 68% 5,434 28% 475 18% 5,909 26% 923 5% 230 9% 1.15~ 5% Totals 19,641 100% 2,695 100% 22,336 100% 3 Routes Residents within the three city area are served by the Company through nine resi- dential ro'~tes, three curbside recycling routes, and four commercial bin routes (one of which is provided by Royal Salvage Company). The Company also employs five debris box drivers. Rates Currently, City residents pay $8.03 per month for 30-gallon service, with 20-gallon mini-can service available for $6.45. For each additional 30-gallon can, residents pay $3.91 per month. All residential rates include recycling service and one clean- up event per year. Commercial solid waste collection service available to City businesses ranges from single can service up to six-yard bin service. Businesses pay $58.28 per month for weekly one-yard bin service and $216.34 per month for weekly six-yard bin service. Related Companies The Company's twelve shareholders also own and operate Royal Salvage Company (RSC) and Blue Line Transfer (BLT). RSC provides solid waste collection and recy- cling services to customers located at the San Francisco International Airport. BLT receives waste from both the Company and from RSC, performs recyclable sorting operations, and transfers the remaining solid waste to Ox Mountain Landfill. The Company is a lessor of equipment from both RSC and BLT. The majority of the leases are with RSC. Also, the Company has leased equipment to RSC in the past. Finally, current capital requirements in excess of available work/ng capital are met through loans from both BLT and RSC. 4 ~ECTION III - Tlq'E COMPANY'S RATE ;,PPI,ICATION In Februa_-y 1992, the Company submitted its rate increase request for the three- year period ending October 31, 1992. The Company requested a 24.9% rate increase retroactive to November 1, 1991. In May 1992, the Company submitted an -mended rate increzse request for a 30.4% increase (refer to Appendix 1). The Company ,mended its rate application because it failed to include the full balancing account -mount in its original application. The Company calculated the required rate increase based on all revenues, including recyclable material sales revenues. The Company correctly included material sales to reduce the revenue requirement, but incorrectly included material sales in the revenue base for determining the rate increase required. (Rate increases have no effect on recyclable material sales revenues) Had the Company calculated the rate increase only on revenues from rates, the requested increase would have been 30.4%. Both the o_-iginal and the -mended rate applications were calculated after the effects of the 4.6% rate increase resulting from increased disposal fees (granted on April 8, 1992, retroactive to November 1, 1991). The Comp-ny's -mended request is sum- marized ir_ Exhibit 1. 5 Exhibit City of South San Francisco 1992 Rate Review Rate Application Summary 1990 Account Description Actual 1991 1992 Actual Projecteded Revenue (At Current Rates) $6,186,618 $6,562,288 $6,901,865 Expenses: Salaries, Wages and Payroll Overhead Disposal Costs Truck snd Equipment Permits and Franchise Costs Causality and Liability Insurance Depreciation Facility Rent and Maintenance Office Expense and Office Supplies Professional Fees Taxes and Licenses Advertising and Business Promotion Utilities and Telephone Operating Supplies Bad Debt Damage Claims Memberships, Dues and Subscriptions Interest Expense Miscellaneous Income Gain on Sale of Equipment $2,599,742 $2,756,260 $2,203,326 $2,090,720 $604,126 $623,777 $413,314 $435,281 $102,521 $130,980 $105,601 $143,757 $88,649 $97,194 $50,484 $82,282 $98,052 $77,848 $33,751 $42,532 $16,379 $15,856 $17,124 $19,534 $23,181 $29,938 $24,728 $23,326 $4,773 $10,614 $5,005 $7,246 $31,151 $48,536 ($8,483) ($12,725) ($29,458) ($1,548) $2,892,690 $2,176,100 $629580 $438,000 $131,000 $98,900 $100 100 $7O99O $88,290 $47 88O $16 000 $22 270 $25,490 $22,080 $8,58o $6,750 $61,900 ($14,000) $o Net Expense ~rofit (as requested by the Company) $6,383.9_-6~6_-i ~(~:~i,408_. $6,822,600 $ 599.2_-3_-8~ '--~625,595 ' $642,734 Total Revenue Requirement $6,983,204 $7,247,003 $7,465,334 Surplus / (Deficit) Beginning Ba~_ancing Account ($ 796,586) '- '~ $684,71 ~ ($563,469~ $0 '- ($796,58-6~ ($1,481,301~ Ending Balancing Account ($796,586) ($1,481,301) ($2,044,770) Required Rate Increase 30.4% 6 Projection Methodoloo~, ReYenlles The Company projected 1992 revenues to increase by 5.2% from 1991, based on the 4.6% rate increase (effective November 31, 1991), and growth during 1992 of 0.6%. Expenses The Comp~my generally used four methods to project expenses: 1) Disposal costs were ass~med to decline to reflect a 7% reduction in disposal volume, multiplied by the current transfer station rate of $35.50; 2) Interest and Depreciation expense were recalculated, based on current prin- cipal_ ~mounts, rates, and current assets using straight line depreciation over the useful lives of the assets; 3) Labor costs were asst~med to increase in accordance with union contracts for direct labor (2.5%), CPI rates for officers' salaries (3.7%), etc.; and, 4) A weighted average of historical expense giving the most recent year's expense the highest weight was used to project the m~jority of the rem~nlng 1992 expenses (e.g., for a three-year weighted average 1991 expenses received a we'ght of three, 1990 expenses received a weight of two, and 1989 expenses received a weight of one). In other words, if 1989-1991 building maintenance expense was $200, $210, and $215, 1992 expense would be projected at a three-year weighted average of $211 (($200+($210x2)+($215x3))/6=$211). Pass-Through Costs Pass-through costs (those on which the Company receives no profit) include disposal costs associated with compliance of regulatory standards ($6.50 per ton, or $467,000 in 1990 and $422,000 in 1991, ~nd $7.50 per ton, or $453,000 in 1992), franchise fees (or a projec-~d $438,000 in 1992) interest expense (or a projected $62,000 in 1992) and annual city service costs (or a projected $84,000 in 1992). Profit Profits were calculated by the Company in accordance with the Agreement at a 90% operating ratio on net operating expenses, less pass-through costs. 1999. Reve,~ue Rea~firement The 30.4% _-equested rate increase ~mounts to a $2,045,000 increase in the cost of providing service (cost plus profit or revenue requirement) to the residents of the City. Based on the Company's rate request, the $2,045,000 revenue requirement increase results from both prior year revenue shortfalls as well as the projected shortfall based on projected expenses and revenues at current collection rates. 7 Prior Year Amounts Due Company Revenue shortfalls of $797,000 in 1990 and $685,000 in 1991 are believed by the Company to have resulted from insufficient rates (the majority of past rate increases have been for disposal cost increases), and declining revenues due to the recession and accounts lost to "junk collectors". Projected Results of Operations A projected revenue shortfall of $563,000 in 1992 reflects a decrease of $122,000 in the Company's revenue shortfsll over 1991. This decrease results from: · A $340,000, or 5.2%, revenue increase due to a 4.6% rate increase effective November 1, 1991, and 0.5% growth in collection revenues; · A $45,000, or 31%, decrease in depreciation expense due to a reduction in the w~mber of depreciable assets, partially offset by; A $-36,000, or 4.9%, increase in salaries, wages and benefits resulting from the addition of a new recycling position, office employee wage increases of 5%, officers' salary increases at CPI (3.7%), and direct labor wage increases (2.5%) per the union contract; An $85,000, or 4.1%, increase in disposal expenses resulting from an increase in the disposal rate at Ox Mountain from $14.00 per ton to $18.00 per ton effective November 1, 1991. This is partially offset by a 7% projected tonnage decrease due to recycling; · A $~_7,000, or 3%, increase in requested profit resulting from an increase in tota~ operating costs; and, · A $25,000, or 1.4%, increase to remaining expenses due to inflation. 8 SECTION IV - REVIEW OF TI:rE COMPANY'S P.~k~ APPI.ICATION Scone of ~eview Our review was performed based on procedures described in the Agreement and on procedures agreed to between the City and HF&H, as described in our engagement letter (refer to Appendant 2) that are s~mm~rized in this section. The scope of our review inc'~uded reviewing the results of operations for the 12-month periods ending October 31, 1990, and 1991, and the projected results of operations for the 12-month period ending October 31, 1992. Specifically, we performed the following tasks: · Re~_ewed the rate application for mathematical accuracy and logical consis- tency; · Agreed the rate application to audited financial statements; Rev'_ewed direct and indirect expenses for contract compliance and for rea- son~bleness based on our knowledge of other solid waste collection companies and public utility rate regulation practices, including review of allocations between franchised and non-franchised expenses, and City and non-City expenses; · Renewed pass-through costs for contract compliance and reasonableness based on the Company's fi~ncial information and operating statistics; · Reviewed 1990 and 1991 actual revenues, including recyclable material sales revenues and collection fee revenues; Reviewed the Company's 1992 projections of revenues, expenses, and profit, for contract compliance and for consistency with current conditions and our knowledge of the solid waste industry based on similar Bay Area and other Cali-'ornia solid waste collection and recycling companies of which we are knowledgeable; Con:pared projected 1992 revenues and expenses to actual 1992 year-to-date results and to 1991 results, and compared actual 1991 results to actual 1990 results; · Reviewed operating statistics to identify any favorable or unfavorable trends and for correlation with projected revenues and expenses; · Identified appropriate adjustments and recalculated profit in accordance with the City's Agreement; and, Calculated the final revenue requirement and determined the necessary rate increase. 9 IJimitation of Review The scope of our review did not comprise an audit of the Company's financial statements. Accordingly, we do not express an audit opinion. Such on audit, the objective of which is an opinion regarding the financial statements taken as a whole, was perfo_-med by the firm of Freeman & Willi~m.~. The auditor's opinion for the Company's last two fiscal years is unqualified. Our review was based, in part, on the Company's projections of the results of opera- tions for t2~e 12 months ending October 31, 1992. The actual results of operations will usually dither from projections because events and circ~m.~tances frequently do not occur as expected, and the difference may be significant. During our review, we found that the Agreement ]enguage, by itself, was not specific enough to provide sufficient guidance in resolving issues related to officer compensation, profit sharing, and the commencement date of the contract for rate purposes. In these cases, we relied solely on the interpretation of the Agreement as provided by City st~. Findings Revenues and expenses appear to be properly supported and in conformance with the City's Agreement, except for the items noted below. Items resulting in an adjustment are reflected in Exhibit 2. 10 Exhibit 2 City of South San Francisco 1992 Rate Review Schedule of Adjustments for the 12-Month Periods Ending October 31, 1990, 1991, and 1992 ($ooo's) Net Expenses (as projected by the Company): Adjustments: Depreciation Interest Expense Lease Expense Promotion Expense and Contributions Transfer Station Fees City SRRE/Rate Review Costs Total Adjustments Adjusted Expenses Adjusted Pass Through Costs: Pass Through Disposal Cost Franchise Fees City Service Costs City SRRE/Rate Review Costs Clean-up Disposal Cost Interest Expense, Adjusted Total Pass _~rough Costs Adjusted Expenses less Pass Through Costs Allowed Pro'it @ 90% Additional Franchise Fees Total Revenue Requirement 1990 1991 1992 $6,384 $6,621 $6,823 ($15) ($37) ($2) ($6) ($7) ($8) ($17) ($23) ($23) ($20) ($20) ($21) $0 $0 ($83) $0 $0 $126 ($58) ($87) ~11) i~,326 -~,534 $6,812 $467 $422 $453 $413 $435 $438 $85 $85 $85 $0 $0 $126 $15 $15 $16 $25 $42 $54 $1,005 $999 $1,172 $591 ~615 $627 N/A N/A $138 $6,917 $7,149 $7,577 Revenues (as projected by the Company): Non Recycling Route Collection Recycling Route Collection Sale of Recyclable Materials Net Revenues Adjustment~: Total Adjusted Revenues Surplus/(Deficit) Beginning Balancing Account Ending Balancing Account $5,941 $6,268 $6,602 $136 $132 $135 $110 $162 $165 .... $6,187 $6,562 $6,902 ($730) ($1,317) ($1,992) Required Ra;e Increase (based on route collections) effective ~-uly 1, 1992 for 16 month period ending October 31, 1993 22.2% 11 Rate AppAcation Term Except unier special circumstances, the Agreement calls for a rate increase not more often than once every two years and the rate review process to occur during the February to July period with rates effective November i of that year. The Company projected revenues and expenses for only one year, their 1992 fiscal year. This restricts the ability of the City to set rates for any future period and presents the need to duplicate the rate application and review process next year. Depreciation Prior to 1990, the effective date of the Agreement, the Company generally depreci- ated trucks over a 7-year useful life. Subsequently, the Company has changed to a 5-year useful life. In our experience with other solid waste companies, useful lives range from 7-10 years. In addition, the Company erroneously included the expenses of a truck that services the City of Millbrae in the 1991 City depreciation expense. We have adjusted depreciation expense to correct the mis-classification of truck expenses and to reflect a 7-year useful life for trucks. Interest Expense The Company included interest expense payable to a former shareholder's estate for the purcha.~e of the Company's shares. We reduced this expense for the amount of the interes~ to be paid on this note. This is consistent with public utility and solid waste rate .regulation practices disallowing expenses related to the purchase of one entity by another. We found that the Company has several long-term notes payable (for working capi- tal) totaling $662,000 as of October 31, 1991, to related parties at a weighted inter- est rate of 8.9% (interest rates range from 8% to 10%). Company management stated that external financing of the working capital requirement was unavailable due to the limited time remaining on their franchise agreement. We believe that the outstanding notes payable are not unreasonable in light of the Company's financial condition and requirements. However, as rate increases are approved, the Company Should be able to reduce these notes payable. Additionally, the Company should consider refinancing the higher interest rate debt. Lease Expense Lease Calculation The Company has several related party lease agreements that are included in the Revenue Requirement. The majority of the lease agreements are with RSC, whose records are exempted from review by the Agreement. All related party lease agreement~, as contained in the Company's annual related party disclosure letter pertaining ~o the City, are summarized in Table 2 (note that in some cases, only a portion of the lease cost shown below is allocated to the City): 12 Table 2 Description Expenses ($000's) Lessor 1990 1991 Containers/Debris Boxes 1983 Volvo Front End Loader Three Recycling Trucks Recycling Bins and Equipment Office and Shop Buildings Compu-~r and Software Four Collection Trucks Total Annual Lease Payments RSC 181 205 RSC 31 31 RSC 66 73 RSC 84 92 RSC 132 132 RSC 19 19 BLT 90 90 603 642 In addition, the Company leased the following vehicle to RSC as shown in Table 3: Table 3 Expenses ($000's) Description Lessor 1990 1991 1980 Volvo Front End Loader The Company 7 0 The Company provided an example of how related party monthly lease payments are calcula-~d. The calculation is similar to a loan with monthly payments. The Company's example used a 12% financing rate. We analyzed each of the RSC leases, using a 12% financing rate. In some cases, we found what appeared to be cost bases higher than what we would expect. However, due to the Agreement (i.e., inability to review RSC financial records), we are unable to conclude whether the lease payments to RSC are reasonable. We also analyzed the BLT leased assets (where financial records are available) and determine/_ that the imputed interest rate was 27%. We recalculated the lease payment for these assets to be equivalent to straight line depreciation plus financing cost at a rate agreed to between the Company and City stst~, or 13%. This results in a reduction of the lease payment by approximately 34%. Finally, we analyzed the Company's lease of equipment to RSC. Based on our analysis, the asset was fully paid for at the end of it's original lease term in 1985. Therefore, we eliminated the amount received from RSC as lease revenue. The adjustment shown in Exhibit 2 represents the combination of this adjustment and that described in the preceding paragraph. Lease Term A second issue related to lease costs is the extension of leases beyond their original term (i.e., useful life). According to Company management, leases are calculated to pay for the asset during its useful life. The effect of lease extensions may be signifi- cant. For example: 13 The building lease is in the second five-year extension of the original term, which also had a five-year term and begsn in 1980. Prior to that time, because financial information is unavailable (such as the original purchase price or any subsequent improvements) we are unable to determine whether the $132,000 annual lease payment is justified. Another exsmple is the commercial and drop box container lease, represent- ing an annual expense of $205,000. This lease has been extended on a month- to-month basis since the original term of the lease expired in October, 1985. Because we do not know the original cost of the various containers or the purchase dates, we are unable to determine the reasonableness of the current mor_thly lease payment. Based on our review of the BLT lease, it appears that any payment subsequent to the original lease term may represent costs in excess of the purchase price of the asset plus -~nancing costs. However, because we do not have access to RSC financial information (e.g., purchase price or any additional improvements) we are unable to determine whether the same standard applies. Table 4 s~mrn~rizes the Company's lease terms. Table 4 Description Lease Term Containers/Debris Boxes 1983 V¢lvo Front End Loader Three Recycling Trucks Recyclir_g Bins and Equipment Office a_-~d Shop Buildings Computer and Software Four Collection Trucks November 1980 - October 19851 March 1983 - March 19902 December 1988 - May 19921 December 1988 - November 1993 November 1980 - October 19853 September 1982 -August 19891 July 1985-June 1993 i Extended on a month-to-month basis. 2 Extended on a year-to-year basis. 3 Extended twice on a five-year term basis. Promotior_ Expense and Contributions The Company included costs in their rate application for items that we consider unnecessary to operating a long-term, exclusive solid waste collection and disposal franchise. _~hese include such things as golf fees, San Francisco Giants and 49er tickets, cha_-itable contributions, and membership dues in local organizations. The Agreement states "...there should be few entertainment expenses which would benefit the rate payers, and therefore, any such expense should adequately docu- ment the benefit to the rate payers directly resulting from the expense." The Company was unable to doo~ment the benefit to the rate payers based on this standard, p_-ior to the preparation of this report. Therefore, we have eliminated these expenses from the Company's historical and projected costs. However, the 14 City has agreed to review the support for these expenses during the next rate review process. Transfer Station Fees The Compa~ny's projected 1992 disposal expense assumes a BLT transfer station rate of $35.50 per ton. The Agreement states tho_t tron~fer rates are reason_~ble if they are within 2% of the BFI-San Carlos Transfer Station rate. The current BFI-San Carlos Transfer Station rate is $33.45. Given the 2% ceiling, the BLT rate is $1.38 per ton higher than the ceiling. We have adjusted disposal fees by the current esti- mated 1992 tonnage multiplied by the $1.38 per ton difference. City SRRE/Rate Review Costs The City has incurred $60,000 for development of the Source Reduction and Recycling Element (SRRE) snd $30,000 for this review. In addition, the City estimated that it will incur approximately $108,000 for its SRRE during the City's 1992-93 fiscal year: Since these costs will be paid by the Company, we have included tie $90,000 incurred to date, plus $9,000 per month for the remainder of the Company's 1992 fiscal year as pass-through costs to cover these costs. Pass-Through Costs The Agreement requires the Company to pass-through a portion of disposal costs for compliance with regulatory fees, that equaled $6.50 per ton, in 1990 and 1991, and $7.50 per ton in 1992. During our review of pass-through costs, we found that the Company did not include as pass-through cost the regulation fee multiplied by the tonnage adjusted by its auditors. However, the correct to~n_~ge was included in disposal expense. Therefore, we recalculated profit based on the exclusion of the appropriate tonnage multiplied by the pass-through rate. The Agreement also calls for the disposal costs of the City's annual clean-up to be a pass-through cost. The Company did not consider this when calculating profit. The Company's fall 1991 semi-annual disposal study was performed during a portion of the City's annual clean-up, which allowed the Company to determiue cle_~n-up tonnage. (Only collection tonnage was used to calculate the City's portion of disposal costs.) We determined the disposal cost by multiplying the clean-up tonnage by the appropriate transfer rate in 1990, 1991, and projected 1992. We recalculated profit based on ~_e exclusion of these costs. In addition, we reviewed the cost of City services provided by the Company. The Company calculated these costs based on the billing (to the City) in place prior to the July 1, 199,~, rate increase. The actual cost of these services is not known. A cost of service study would be required to determine the actual costs of these services. However, the methodology used does not appear unreasonable, assuming that drop box rates ir_ July, 1990, were profitable. However, as costs increase in the future, this methodology may become inadequate if the costs exceed the rates charged prior to July, 1990. The City should continue to monitor this pass-through expense for accuracy. 15 Franchise Fees The Company failed to consider the effect of higher revenues on franchise fees. We recalculated franchise fees at 7% of the adjusted revenue requirement, and made the appropria-~ adjustment. Other Findings Allocation of Route Costs The Agreement requires the Company to directly charge route costs to the cities where the route provides service and, if any route is shared between cities, to allo- cate the route costs based on the tonnage collected. However, the Company does not maintain tonnage information on a per route basis. Therefore, it is not possible to allocate individual routes based on individual route tonnage. As a result, because all routes are not specific to one city, the most appropriate allocator, based on the Agreement, would be to allocate route costs based on tonnage collected. Twice eack year, the Company performs a tonnage study by weighing all Company and related party incoming tonnage at BLT. Each study period typically lasts four weeks. The results of the study are acc~mulated by Company (RSC, BLT, and the Company) and by city. Average tons per day by Company, per the study, is used as the basis to assign tonnage to RSC and BLT on a daily basis. The remaining ton- nage is allocated to the three cities based on the percent of total Company tonnage determined by the study. For example, if the study showed that RSC and BLT generated 30 and 50 tons per day, and the City's share of the Company's tonnage was 74%, on a day where 100 tons were transferred to Ox Mountain Landfill, the City's allocated tonnage would be 14.8 tons, or (100-30-50)*74%=14.8 Tons. To determine if the labor costs within the three cities are reasonably assigned, we compared the total labor costs for 1990-1992 to the total tonnage allocator based on the semi-annual tonnage studies. Based on this comparison, we found that the City's portion of total labor cost is not m~_terially different from the City's portion of disposal costs. Therefore, we consider the total direct labor costs to be reasonable, based on available information, but not in accordance with the agreement. "projection l ~ethodology As described in Section III, the Company projected a large number of expenses based on a weigh-~d average of historical expenses. For example, a three-year weighted average would give the most recent year's expense amount (1991) a weight of three, 1990 expense amount a weight of two, and 1989 expense amount a weight of one. In other words, if 1989-1991 building maintenance expense was $200, $210, and $215, 1992 expense would be projected at a three-year weighted average of $21 (($200+($2k0'2)+($215'3))/6=$211). This is a conservative project/on methodology in a period of rising prices as it does not consider the effects of inflation but only historical expense levels and, therefore, lower unit prices.' However, in some cases, there have been increasing and decreas- ing unit prices (e.g., diesel fuel and petroleum-related products) where this approach 16 would be reasonable. In addition, expenses other t. hon disposal, labor, depreciation, and interest are projected to increase in total by appro~m~tely 0.6% and, therefore, overall, the result of this methodology may be overly conservative. Office and Administration Expense Allocator The Agreement requires the Company to allocate General and Administrative expenses based on the number of customers within each city. The Company has interpreted the number of customers to be residential customers only. Since it believes that the majority of office work is driven by residential customers. They represent a disproportionate share of phone c~lls over-billing, extra service, missed service, st~wts and stops, and special debris box pulls). CompAny management believes this was the intent of the contract language. Table 5 illustrates the differ- ence between an allocation based on 1992 residential customers versus total cus- tomers (1990 and 1991 commercial customers are unavailable). Table 5 South San Francisco Scavenger Company General and Admlni~tration Allocator City_ Residential Only All Customers South San Francisco 67.6% 68.4% Millbrae 27.7% 26.5% Brisbar_e 4.7% 5.2% We believe the approach the Company has used is not unreasonable, since the majority of office work may be driven by residential customers. However, if the City believes that the Company should allocate General and Administrative expenses based on total customers, projected 1992 expenses would increase by approximately $16,000. Adjusted -~mte Increase Except und_er special conditions, the Agreement calls for a rate increase not more 'often tbon once every two years. Because the Company did not prepare their rate application with two years of projections, rates cannot be set for a two year period. The adjusted rate increase of 22.2%, shown in Exhibit 2, represents the rate increase required to cover the 1992 projected revenue requirement and balancing account, spread ove_- a 16-month period beginning July 1, 1992, through October 31, 1993. 17 SECTION V - RECOM1WENDATIONS Based on our review, we recommend that: 1) The City increase garbage rates by 22.2%, effective July 1, 1992, to bring the Company whole by October 31, 1993, for operations during the two-year period ending October 31, 1992. 2) The City require the Company to prepare a rate application, including: the projected results of operations for the three year period ending October 31, 1995. This rate application should be submitted by February 28, 1993, and rev/ewed by July 1, 1993, with rates effective November 1, 1993 through October 31, 1995. 3) The City monitor the Company's capital position and ensure that related party financing is reasonable. As rate increases are approved by the City, the Company should reduce its debt. Further, the Company should consider reft- nancing its debt that incurs a 10% interest rate. 4) The C:_ty require the Company to receive City approval prior to entering any new lease agreements, extensions, or modification/asset additions to current lease sgreements. The Company should provide support for the necessity of the lease (vs. purchasing) and detail the computation of the lease payment. In addition, for related party leases where the basis is available (i.e., leases with BLT), -~he City should disallow any cost that would be in excess of what the Comps_ny would pay to purchase and finance any asset. Because the City has entered into a long-term Agreement with the Company, we believe that the City's rate payers would best be served through the purchase of assets, as it is usually less expensive than operating leases. However, the Company is currently leasing several assets from RSC, whose records are specifically exempted from review by the Agreement and, therefore, the City is not able to determine the reasonableness of the lease payment. The best solu- tion to resolve this issue would be for the City to re-negotiate the Agreement to allow review of financial information regarding related party lease agreements with RSC in order to analyze the costs to rate payers. If re-negotiation is not possible, another alternative is for the City to require that all future lease agreements be made only with BLT, as the Agreement allows for review of BLT financial information. Regardless, the Agreement requires that the City receive documentation in advance of any transaction in excess of $20,000 (with the exception of the con- tainer ~ease) and, therefore, has the capability to require, for any future lease agreement greater than $20,000, that the Company prove that the lease (vs. purchase) is necessary, and that the Company provide support for the calcula- tion of-~he lease payments prior to City approval. 5) The Company should allocate labor costs in accordance with the agreement in all future rate applications. 18 SOUTH SAN FRANCISCO SCAVENGER CO., INC. FORECASTED~REVENUE REQUIREMENT For The Year Ending October 31, 1992 As Amended April 30, 1992 Net Operating and Disposal Costs - Schedule A Allowable Profit - Schedule B Pass Through Costs - Schedule C Balancing Account - 10/31/91 Gross Revenue Requirement Gross Current Revenue 11/1/91 Rate Increase Revenues ($6,562,288 x 4.6%) Additional Revenue Requirement Percentage Increase Requirement 6,600,000 301.865 $5,784,603 642,734 1,037,997 1,481,301 8,946,635 6,901.865 $2,044,770 29.6% SCHEDULE A FORECASTED NET OPERATING AND DISPOSAL COSTS For the Year Ending October 31, 1992 Operating Costs Salaries, Wages and Payroll Overhead Dump Charges Truck and Equipment Franchise Fees Casualty and Liability Insurance Depreciation Facility Rent and Maintenance office Supplies and Expense Professional Fees Taxes and Licenses Advertising and Promotion Utilities and Telephone Operating Supplies Bad Debts Damage Claims Memberships, Dues and Subscriptions $2,892,690 2,176,100 629,580 438,000 131,000 98,900 100,100 70,990 88,290 47,880 16,000 22,270 25,490 22,080 8,580 6,750 Total Operating Expenses Less: Dump Charges Franchise Fees City Service Costs - Schedule D 2,176,100 438,000 84,924 Net Operating Costs Disposal Costs .Dump Charges Less Charges Attributable to Ox Mountain Assessment ($7.50/tcn x 60,423 tons) Net Disposal Costs Total Operating and Disposal Costs Less: Non Operating Income Miscellaneous Income $6,774,700 (2,699,024) $4,075,676 $2,176,100 ( 453,173) $1,722,927 $4,075,676 1,722,927 5,798,603 ( 14,000) NET OPERATING AND DISPOSAL COSTS $5,784,603 SCHEDULE B ALLOWABLE PROFIT CALCULATION For the Year Ending October 31, 1992 Forecasted Net Operating and Per Schedule A Allowable Operating Ratio Allowable Profit Disposal Costs $5,784,603 90% $ 642,734 SCHEDULE C FORECASTED PASS THROUGH COSTS For the Year Ending October 31, 1992 Dump Charges Attributable to Ox Mountain Assessmenu - Schedule A Franchise Fees - Schedule A Interest Expense Annual City Service Costs - Schedule D Total Pass Through Costs $ 453,173 438,000 61,900 84,924 $1,037,997 SCHEDULE D FORECASTED ANNUAL CITY SERVICE COSTS For the Year Ending October 31, 1992 Street Department Sewage Plant City Buildings Street Cleaner - (Direct to Transfer Station) Average # of TriDs / Month Average Month Charge Projected Annual Charge 30 3,341 $40,092 18 2,574 30,888 830 9,960 332 7,077 Total Forecasted Annual City Service Costs 3,984 $84,92_4 SOUTH SAN FRANCISCO SCAVENGER CO., INC. REVENUE REQUIREMENT For The Year Ending October 31, 1991 Net Operating and Disposal Costs Allowable Profit - Schedule B Pass Through Costs - Schedule C Balancing Account - 10/31/90 Gross Revenue Requirement Gross Current Revenue Additional Revenue Requirement Percentage Increase Requirement - Schedule A $5,630,355 625,595 991,053 796,586 8,043,589 6,562,288 $1,481,301 22.6% SCHEDULE A NET OPERATING AND DISPOSAL COSTS For the Year Ending October 31, 1991 Operating Costs Salaries, Wages and Payroll Overhead Dump Charges Truck and Equipment Franchise Fees Casualty and Liability Insurance Depreciation Facility Rent and Maintenance office Supplies and Expense Professional Fees Taxes and Licenses Advertising and Promotion Utilities and Telephone Operating Supplies Bad Debts Damage Claims Memberships, Dues and Subscriptions $2,756,260 2,090,720 623,777 435,281 130,980 143,757 97,194 82,282 77,848 42,532 15,856 19,534 29,938 23,326 10,614 7,246 Total Operating Expenses Less: Dump Charges Franchise Fees City Service Costs - Schedule D 2,090,720 435,281 84.924 Net Operating Costs Disposal Costs Dump Charges Less Charges Attributable to 'Ox Mountain Assessment ($6.50/ton x 64,971 tons) Net Disposal Costs Total Operating and Disposal Costs Less: Nor Operating Income Miscellaneous Income NET OPERATING AND DISPOSAL COSTS $6,587,145 (2.610.925) $3.976.220 $2,090,720 ( 422,312) $1, 68,408 $3,976,220 1,668,408 5,644,628 ( 14,273) $5,630,355 SCHEDULE B ALLOWABLE PROFIT CALCULATION For the Year Ending October 31, 1991 Net Operating and Disposal Costs Per Schedule A Allowable Operating Ratio Allowable Profit $5,630,355 90% $ 625,595 SCHEDULE C PASS THROUGH COSTS For the Year Ending October 31, 1991 Dump Charges Attributable to Ox Mountain Assessment - Schedule A Franchise Fees - Schedule A Interest Expense Annual City Service Costs - Schedule D Total Pass Through Costs $ 422,312 435,281 48,536 84,924 $ 991,053 SCHEDULE D ANNUAL CITY SERVICE COSTS For the Year Ending October 31, 1991 Street Department Sewage Plant City Buildings Street Cleaner - (Direct to Transfer Station) Total Annual City Service Costs Average # of Trips / Month Average Month CharGe Projected Annual Charge 30 3,341 $40,092 18 2,574 30,888 830 9,960 332 7,077 3,984 $84,924 SOUTH SAN FRANCISCO SCAVENGER CO., INC. REVENUE REQUIREMENT For the Year Ending October 31, 1990 As Amended April 30, 1992 Net Operating and Disposal Costs - Schedule A Allowable Profit - Schedule B Pass Through Costs - Schedule C $5,393,143 599,238 990,823 Gross Revenue Requirement $6,983,204 $6,983~204 Current Year Route Collection Revenues Additional Revenue Requirement Percentage Increase Requirement 6,186,618 796,586 12.9% SCHEDULE A NET OPERATING AND DISPOSAL COSTS For the Year Ending October 31, 1990 OPERATING COSTS Salaries, Wages and Payroll Overhead Dump Charges Truck and Equipment Franchise Fees Casualty and Liability Insurance Depreciation Facility Rent and Maintenance office Supplies and Expense Professioral Fees Taxes and Licenses Advertising and Promotion Utilities and Telephone Operating Supplies Bad Debts Damage Claims Memberships, Dues and Subscriptions Total Operating Expenses $2,599,742 2,203,326 604,126 413,314 102,521 105,601 88,649 50,484 98,052 33,751 16,379 17,124 23,181 24,728 4,773 5,005 Less: Dump Charges Franchise Fees City Service Costs - Schedule D 2,203,326 413,314 84,924 Net Operating Costs DISPOSAL COSTS Dump Charges Less Charges Attributable to Ox Mountain Assessment ($6.50/ton x 70,990 tons) Net Disposal Costs Total Operating and Disposal Costs Less: Non Operating Income Miscellaneous Income Gain on Sale of Equipment Net Operating and Disposal Costs $6,390,756 (2,701,564) $3,689,192 $2,203,326 ( 461,434) $1,741,892 $ 8,483 29,458 $3,689,192 1.741,892 5,431,084 ( 37,941) $5,393 ,_143. SCHEDULE B ALLOWABLE PROFIT CALCULATION For the Year Ending October 31, 1990 Net Operating and Disposal Costs Per Schedule A Allowable Operating Ratio Allowable Profit $5,393,143 90% $ 599,238 SCHEDULE C PASS THROUGH COSTS For the Year Ending October 31, 1990 Dump Charges Attributable to Ox Mountain Assessment - Schedule A Franchise Fees - Schedule A Interest Expense Annual City Service Costs - Schedule D Toual Pass Through Costs $ 461,434 413,314 31,151 84,924 $ 990,823 SCHEDULE D ANNUAL CITY SERVICE COSTS For the Year Ending October 31, 1991 Average # of Trips / Month Street Department Sewage Plant City Buildings Street Cleaner - (Direct to Transfer Station) Average Month Charge Total Annua2 City Service Costs Projected Annual Charqe 30 3,341 $40,092 18 2,574 30,888 830 9,960 332 7,077 3,984 $84,924 · .'-:' · HILTON FARNKOPF & HOBSON {HILTON FARNKOPF & HOBSON Adviscry SeN'ices to ~-~---.- Munic'pal Management 39350 Civic Center Drive. Suite 100 Fremont, California 94538-2331 Telephone: 510/713-3270 Fax: 510/713-3294 March 4, 1992 Ms. Amy Margolis DireCtor of Finance City of Sou-.h San Francisco City Hall Annex 315 Maple Avenue P.O. Box 721 So. San Francisco, CA 94080 ENGAGEME~NT LETTER FOR THE REVIEW OF SOUTH SAN FRANCISCO SCAVENGER COMPANY'S RATE REQUEST Dear Ms. M_argolis: Hilton Farr_kopf & Hobson is pleased to submit this proposal to assist the City of South San Francisco (City) in the review of South San Francisco Scavenger Company's (Company) rate increase request application (Application). BACKGROUND In 1990, the City entered a new agreement with the Company. Section 6 of the agreement details the procedures for the submission of rate applications, and their review. The Company submitted a rate increase request on January 6, 1992, asking for a 4.7% increase for d,,mp fee increases, plus 11.8% for other operating costs. OBJECTIVES The objective of this review is to provide an independent expert review of the Company's Application. This review will result in a specific recommendation for an over~l rate increase. HILTON FARNKOPF & HOBSON March 4, 1992 Ms..Amy Margolis Page 2 SCOPE OF REVIEW We will pe_fform the following four key tasks related to the review of the Company's Application. Task 1: Kick offMeetin~, We will meet with the City to discuss the past practices related to the regulation of the Company's rates and their precedence for the current Application. We will agree on a specific report fo _rrn~t as well as the schedule for the conduct of the study. Task 2: Orientation Meetinf with ConlDanv In prepara-,ion for our meeting with the Company, we will prepare a list of documents and schedules that we believe will be necessary to conduct our review. We will meet with the Company to discuss the Application, the list of documents and the study schedule. Task 3: R~,view of Comoany's Aoolication Once the Company has prepared and assembled the list of doc~ments described above, we will begin our fieldwork. We will review the Application by performing the following eight sub-tasks: A. Review the mathematical accuracy and logical consistency of the Application. B. Reconcile the Application to the Company's audited financial statements. Co Review the Application for compliance with the City's current contract, past policies and practices. D. Review the reasonableness of the projected expenses. This sub-task will be composed of the following six activities: 1.) Review management's plans regarding progrnms including the tra_nsfer station operating costs, landfill disposal costs, any other solid waste or recycling program costs, and significant related party transactions. ~-~ HILTON FARNKOPF & HOBSON March 4, 1992 Ms. Amy M_argolis Page 3 TbAs step will include a review of the Company's equipment leases with related parties to determine if they are reasonable and beneficial to the ratepayers. Based on our preliminary review, we believe that this may become one of the more significant issues contained in the Company's Application. 2.) Identify the key cost factors identified by the Company in it's projected costs. 3.) Review the support for the assl~mptions regarding key cost factors. We will review both historical and projected wages, benefits, taxes, administrative costs, other operating and mo_intenance expenses, and capital costs. 4.) Review the support for, and the reasonableness of the basis used to allocate shared costs between jurisdictions served by the Company and recommend alternatives to the current allocators used, if appropriate. 5.) Perform analytical procedures comparing past, current, and future projections, and obtain fluctuation comments from the Company. 6.) Calculate adjustments, if any, to the Company's projected expenses, based on the review described above. Review operating statistics, comparing current operating statistics to those of other solid waste companies, and the Company's previous rate applications. Calculate profit in accordance with the City's current contract and rate pol"_cies. Calculate the Company's projected revenue requirement. Review the projected revenues and calculate the required revenue (ra;e) increase. This sub-task will be composed of the following four activities: 1.) Review historical and projected collection and recycling customer acc ~unts by rate category. HILTON FARNKOPF & HOBSON March 4, 1992 Ms. Amy Margolis Page 4 2.) Calculate projected collection and recycling revenues based on current rates and customer counts and other revenues based on past experience. 3.) Review recyclable material sales for reasonableness and accuracy. 4.) Compare projected collect/on and recycling revenues to revenue rec_u/rements (from G. above) and calculate the necessary rate increase. Task 4: Communicate Results This task is composed of four sub-tasks, as follows: Ae Meet with the Company (once) to review any adjustments to expenses, prcfits, and/or revenues and to identify any issues with which the Company disagrees. Meet with the City (once) to review the results of the review and to discuss issues with which the Company disagrees. Draf'c report, review draf~ report with Company and City (at one meeting), and amend drape report as appropriate. D. Prepare final report and present report to the City Council LIMITATIONS The scope of our review does not comprise an audit of the Company's financial statements or projections. Our review is substantially different in scope than an examination in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we will not express such an opinion. However, we understand that such an audit was performed by the firm of Freeman and Williams. We have reviewed the report on the internal control review prepared by the Company's auditors, and it appears that the Company may have some financial internal cor_trol problems. We concur that some internal control problems may exist, but we are unable to determine their effect, if any, on our review at this time. Therefore, we have not anticipated that internal control weaknesses HILTON FARNKOPF & HOBSON March 4, 1992 Ms. Amy Margolis Page 5 will effect our scope of work, schedule or fees. However, if the internal control weaknesses are significant, we will notify you upon discovery, as to any scope limitations, adverse schedule or possible fee impacts prior to proceeding. Based on o'er preliminary review of the item.~ submitted by the Company and forwarded -~ us, we have not received revenue and expense projections for fiscal year 1992, or fiscal year 1991 actual results. Our ~mderstanding of the rate review process includes a review of historical results of operations (fiscal year 1991), and projected results of operations (fiscal year 1992). If indeed the Company has not yet prepared these items, delays may result. ADDITIONAL SERVICES The City's current residential rate structure is a declining rate structure. For example, d"sposal of one 32 gallon can costs $8.53 per can, while disposal of three 32 gnllon cans costs $5.62 per can. This rate structure may have been more appropriate when disposal costs were a smaller part of total collection and disposal costs, and before AB 939 m_~ndated disposal reduction of 50% of the City's wastestre~m. If the City is interested in pursuing an alternative to this declining rate structure, we could perform an analysis of the City's current structure and provide up ;o three alternatives. Based on our current billing rates and our estimate of time required, we could provide you this service for a not to exceed fee of $5,003. SCHEDULE We anticip~_te completing the rate review, issuing our report, and presenting the report to the City Council within two months after we begin. The commencement of our review will be contingent upon the Company preparing the documents and schedules for our review. In addition, our schedule is dependent '~pon the cooperation of the Company and timely responses to questions that may arise from our review. Any significant delay by the Company in providing the requested information may delay the issuance of our report. recycteO ~'~Daoer HILTON FARNKOPF & HOBSON March 4, '_992 Ms..Amy Margolis Page 6 QUALIFICATIONS HF&H has extensive experience in providing solid waste rate and regulatory services. We have previously provided you a comprehensive list of previous engagements including the name and telephone n~mber of the client's principal representative. We encourage you to select any of our current or previous clients for references. PROJECT TEAM We will staff the project with the following key project members: lVIr. Robert Hilton will serve as the Project Parmer. He will be responsible for refining the project approach, attending key meetings, directing the I-IF&H staff and making presentations. Mr. Hilton is exceptio~Mly qualified to serve in this capacity as doo~mented in his r~s~m~. Mr. Troy ~arner will serve as the project supervisor. Responsible to Mr. Hilton, he will perform and supervise the analyses including the supervision of Mr. Caruso. A CPA with five years and 33 engagements of directly related experience, Mr. Garner is extremely q~mlified to serve in this role. Mr. Joke ~aruso will assist Mr. Garner in the preparation of spreadsheets, collection of data, and performance of more routine _analytical tasks. Mr. Caruso has performed similar duties in our reviews of Oakland Scavenger Company, Valley Waste Management, Coast Waste Management, Mashburn Disposal, ~.nd other solid waste collection and disposal companies. .FEE Our not-to-exceed fee for conducting this engagement in accordance with the scope desc.-ibed above, is $29,800. Our fee is based upon the estimated hours required by the assigned staff to perform the various tasks multiplied by the staffs hourly rate. If actual hours incurred are less, we will bill you for the lower _amo~nat. If the terms of this engagement are acceptable to the City, please indicate whether you want us to perform only the basic rate review or in addition, you want us to perform the rate structure analysis, and your approval by signing HILTON FARNKOPF & HOBSON March 4, ;992 Ms..Amy Margolis Page 7 below· Should you have any questions, please call me at (510) 713-3270. Very truly yours, Robert D. :-Iilton, CMC Managing Partner ~f/Basic Review of Rate Request $29.800 Basic Review of Rate Request plus Rate Structure Analysis $34·800 Approved: ~.~,~ ct/Y- '4- ~' ~- Dat$ City Manager . ,,-.'.;.!:..,, ..:,,,,..,,.;? -.-