CC 2015-10-13_09a SCSS Presentation1
October 13, 2015
South County Sanitary Service Rate Review
City of
Arroyo Grande
South County Sanitary Service Rate Review
January 15, 2013
City of Pismo Beach
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Report Purpose
Analyze rate request by SCSS for:
City of Arroyo Grande
City of Grover Beach
Oceano Community Services District
City of Pismo Beach
Why jointly?
Same services
Same franchise agreements
Same rate review methodologies
Financial information closely related for each agency
South County Sanitary Service Rate Review
January 15, 2013
City of Pismo Beach
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Three Year Rate Review 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
This is a “base year” review
Interim Years. In second and third years, SCSS is eligible for Interim Year rate adjustments that address three key change factors
Consumer price index (CPI) for “controllable” operating
costs
“Pass-though costs” (primarily tipping fees)
Adjustment for franchise fees
South County Sanitary Service Rate Review
January 15, 2013
City of Pismo Beach
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Independently evaluated 3 separate issues
Rate increase request for January 1, 2016.
Multi-year rate increase for 2017 and 2018.
Cost of living threshold that triggers option for franchise agreement termination within nine months
after rate increase.
South County Sanitary Service Rate Review
January 15, 2013
City of Pismo Beach
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January 1, 2016 rate increase
SCSS has provided the supporting documentation required under the City’s franchise agreement.
SCSS provides a comprehensive level of service –curbside trash, recycling and green waste
– at very competitive rates compared with similar communities.
SCSS has done an excellent job of managing costs and revenues.
Rate Recommendation. Approve SCSS request for 3.25% rate
increase on January 1, 2016 (slightly less than allowed increase of 3.67%).
South County Sanitary Service Rate Review
January 15, 2013
City of Pismo Beach
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Multi-year rate increase: next 2 years
Requested approach (appropriately noticed under Proposition 218):
Annual increase (if any) in US CPI-U from June 2016 for January 1, 2017 and June 2017 for January 1, 2018.
Increase
of 0.79% for 2017 and 0.77% for 2018 for increases in the cost of landfill disposal.
Very similar but slightly different from Interim Year rate-setting methodology.
South County Sanitary Service Rate Review
January 15, 2013
City of Pismo Beach
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Approach under franchise agreement
3 adjustment factors under Interim Year rate setting methodology
Changes in the CPI-U for “controllable” operating costs
Changes in “pass-through costs” (primarily tipping fees)
Adjustment
to cover increased franchise fees
First two factors “weighted” by pro rata share of total costs (excluding franchise fees).
Current Base Year analysis for 2016
Controllable costs account for 84% of total costs
Tipping
fees account for 16%
South County Sanitary Service Rate Review
January 15, 2013
City of Pismo Beach
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Interim Year Sample: 2% CPI-U
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January 15, 2013
City of Pismo Beach
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Comparison with proposed approach
Interim Year 2.75%
Proposed Approach 2.79%
0.04% difference
1-cent rate difference for 32-gallon and 64-gallon customers
South County Sanitary Service Rate Review
January 15, 2013
City of Pismo Beach
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Multi-Year Rate Recommendation
Approve proposed approach for 2017 and 2018
Very minor difference in results.
More straightforward, streamlined process that’s consistent with the Interim Year rate-setting concepts
(as well as the Proposition 218 notice provided to SCSS customers).
If adopted, Interim Year rate reviews for 2017 and 2018 will not be required.
South County Sanitary Service Rate Review
January 15, 2013
City of Pismo Beach
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Trigger Option
If rate request exceeds cumulative cost of living increase from franchise agreement revision, 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.
South County Sanitary Service Rate Review
January 15, 2013
City of Pismo Beach
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SCSS Calculation of Trigger
In their calculation, SCSS believes that an increase of 3.25% avoids the “trigger option.”
But my calculation reduces the “trigger” to 1.5%.
Why the difference?
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January 15, 2013
City of Pismo Beach
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CPI Threshold Calculation
South County Sanitary Service Rate Review
January 15, 2013
City of Pismo Beach
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Threshold Variance Summary
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January 15, 2013
City of Pismo Beach
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Policy Options
Agree with SCSS exclusions in calculating rate increases subject to the “trigger.”
Conceptually similar to the 1.7% exclusion agreed to 2011.
Use “Alternative” calculation but make findings
that City will not pursue the “trigger” option if the requested rates are approved.
Use the “Alternative” methodology and approve the requested rate increase but retain the right to
potentially pursue contract termination over the next nine months.
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January 15, 2013
City of Pismo Beach
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Recommendation
Option 2: Use “Alternative” calculation but make findings that City will not pursue the “trigger” option if the requested rates are approved.
Allows approval of the current requested
rates as reasonable.
But retains flexibility in future rate reviews by retaining the “Alternative” methodology as the basis for this and future rate increases.
South County Sanitary Service Rate Review
January 15, 2013
City of Pismo Beach
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Rate Application Review
Per the adopted methodology in the City’s Franchise Agreement with SCSS
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January 15, 2013
City of Pismo Beach
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Two Key Questions
Should SCSS be granted a rate increase for January 1, 2016?
If so, how much?
How much does it cost to provide required service levels?
Are these costs reasonable?
And if so, what is
a reasonable level of return?
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City of Pismo Beach
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Are costs reasonable?
Looked at costs from three separate perspectives
Detailed review of costs and changes by key cost components
Two-year cost increase of 1.3% in “controllable” costs (0.65% per year).
Comparison
of cost increases with CPI
Two-year CPI increase of 2.2% compared with 1.3% increase in costs
Rates in comparable communities
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January 15, 2013
City of Pismo Beach
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South County Sanitary Service Rate Review
January 15, 2013
City of Pismo Beach
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Key Cost Drivers
0.81%: $2.25 per ton increase in the cost of landfill disposal.
1.10%: implementing organics waste diversion program.
1.34%: all other cost increases such as vehicle fuel, ongoing maintenance
and labor.
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January 15, 2013
City of Pismo Beach
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What’s a reasonable return on these costs?
Allowable costs (operations and maintenance)
Pass-through costs
Tipping fees
Franchise fees
Related party lease and transportation costs
Excluded costs
Charitable and political contributions
Entertainment
Income taxes
Non-IRS approved profit-sharing plans
Fines and penalties
Limits on officer compensation
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January 15, 2013
City of Pismo Beach
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Methodology
Target: 92% operating profit ratio on “allowable costs”
Recovery but no profit on pass-through costs
Tipping fees
Franchise fees
No revenues for excluded costs
No retroactivity: prospective only
Implementation
Detailed “base year” reviews every three years
Interim reviews in the two in-between years based on CPI for operating costs; and “pass-through”
on any tipping and franchise fees
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January 15, 2013
City of Pismo Beach
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Allowed Revenue Increase
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Rate History
2.4% annual increase
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City of Pismo Beach
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Conclusion
Costs are reasonable
Proposed rate increase meets “reasonable return” criteria
Requested rate increase of 3.25% is slightly less than allowable increase of 3.67%
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Recommendation: 3.25% Rate Increase
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Other Recommendations
Approve multi-year rate approach.
Make findings that the City will not pursue the trigger option if recommended rates are approved.
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City of Pismo Beach
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Questions?
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City of Pismo Beach
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