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CC 2014-05-27_09.b. Solid Waste Presentation1 May 27, 2014 South County Sanitary Service Interim Year Rate Review City of Arroyo Grande South County Sanitary Service Rate Review May 27, 2014 City of Arroyo Grande 1 Report Purpose Analyze SCSS rate request for: City of Arroyo Grande City of Grover Beach Oceano Community Services District City of Pismo Beach Why jointly? Similar services Similar franchise agreements Similar rate review methodologies Financial information closely related for each agency South County Sanitary Service Rate Review May 27, 2014 City of Arroyo Grande 2 Overview of Findings SCSS has provided the supporting documentation required for an Interim Year rate increase under the City’s franchise agreement with them. Rate Recommendation. Approve SCSS application for 2.05% rate increase. South County Sanitary Service Rate Review May 27, 2014 City of Arroyo Grande 3 Cost of Living “Trigger” Option 2.05% rate increase less than increase of 2.78% allowed under the adopted rate-setting methodology If rate request exceeds cumulative cost of living increase, City has the option of terminating agreement within 9 months Does not directly limit rate increase But subjecting franchise agreement to possible termination if rate request greater than the cost of living threshold provides a strong incentive for SCSS to do so Cost of living increase threshold to avoid triggering potential for termination: 2.05% This the amount of the requested increase. South County Sanitary Service Rate Review May 27, 2014 City of Arroyo Grande 4 Basis for Review City of San Luis Obispo detailed manual on: Rate-Setting Process and Methodology for Integrated Solid Waste Management Rates Adopted by the City as the basis in its franchise agreement with SCSS South County Sanitary Service Rate Review May 27, 2014 City of Arroyo Grande 5 Cost Recovery Methodology Target: 8% operating profit ratio on allowable costs Cost recovery but no profit on pass-through costs that are not controllable by SCSS Tipping fees Franchise fees No revenue recovery at all for excluded costs Charitable and political contributions Entertainment Income taxes Limits on officer compensation South County Sanitary Service Rate Review May 27, 2014 City of Arroyo Grande 6 Implementation: Three Year Cycle Base Year. The first year of the cycle - Base Year - requires comprehensive, detailed analysis of revenues, expenses and operating data Last “base year” analysis completed in December 2012 Interim Years. In second and third years, SCSS is eligible for Interim Year rate adjustments that address two key change factors Consumer price index (CPI) for “controllable” costs “Pass-though costs” (primarily tipping fees), which SCSS does not control South County Sanitary Service Rate Review May 27, 2014 City of Arroyo Grande 7 Rate Setting History Average annual rate increase: 2.6% South County Sanitary Service Rate Review May 27, 2014 City of Arroyo Grande 8 Document Review and Analysis Franchise agreements for each agency Prior base year and interim year rate reviews SCSS audited financial statements SCSS rate request application and supporting documentation Correct process, forms and calculations used in preparing request Consumer price index data correctly gathered and “weighted” Adjustments for tipping fee costs adequately documented and “weighted” Adjustmen ts to account for franchise fees correctly calculated Cumulative CPI “trigger” correctly calculated South County Sanitary Service Rate Review May 27, 2014 City of Arroyo Grande 9 Allowable Rate Increase Summary South County Sanitary Service Rate Review May 27, 2014 City of Arroyo Grande 10 Cumulative CPI Trigger South County Sanitary Service Rate Review May 27, 2014 City of Arroyo Grande 11 Future Considerations No provision for retroactivity Important to act on rate applications in timely way Recommendation Given 45-day notice requirement and time for review and adoption for January 1 implementation: SCSS should submit rate application in August Consistently use June to June CPI changes for annual and cumulative calculations South County Sanitary Service Rate Review May 27, 2014 City of Arroyo Grande 12 Conclusion SCSS is eligible for an Interim Year rate increase of 2.78%. However, SCSS has requested a lower rate increase of 2.05%, which avoids triggering an option for early franchise agreement termination. South County Sanitary Service Rate Review May 27, 2014 City of Arroyo Grande 13 Recommendation: 2.05% Rate Increase South County Sanitary Service Rate Review May 27, 2014 City of Arroyo Grande 14 Questions? South County Sanitary Service Rate Review May 27, 2014 City of Arroyo Grande 15