REPORT TO THE CITY COUNCIL
February 25, 2016
FROM: THOMAS C. ESQUEDA, Director
Department of Public Utilities
BY: JERRY L. SCHUBER SR., Assistant Director
Department of Public Utilities - Solid Waste Management Division
SUBJECT
Title
Approve the Index-Based Rate Adjustments (Rate Period 5) for Commercial Solid Waste Franchise Services as Requested by Mid Valley Disposal (“Mid Valley”) and Allied Waste (“Allied”) for Disposal of Multi-Family, Commercial Solid Waste, Recyclable and Organic Material.
Body
RECOMMENDATION
It is recommended the City Council approve the Index-Based Rate Adjustments for Commercial Contractor’s Mid Valley and Allied, pursuant to the Multi-Family and Commercial Solid Waste Services Franchise Agreement.
EXECUTIVE SUMMARY
On September 29, 2011, the Fresno City Council awarded exclusive commercial solid waste franchises to Mid Valley and Allied (“Franchisees”) to provide commercial solid waste (“CSW”) services within the municipal corporate limits of the City. The Multi-Family and Commercial Solid Waste Franchise Agreement (CSW Agreement) allows Mid Valley and Allied, on an annual basis, to submit requests for commercial solid waste service rate increases.
In October 2015, both Mid Valley and Allied submitted requests for rate increase for CSW services, with the new rates planned to become effective January 2016. City staff, with the assistance of the R3 Consulting Group, reviewed the rate increase requests and supporting documentation from the Franchisees, and determined both Mid Valley and Allied are contractually entitled to index-based rate adjustments for Period 5 (Calendar Year 2016) in the amount of 1.20 percent for Allied and 1.40 percent for Mid Valley. The adjustments differ slightly due to variation in fuel consumption related to the Franchisees’ service areas.
City staff confirmed the methodology used by Mid Valley and Allied in the rate increase requests complies with Article II of the CSW Agreement. Therefore, City staff recommends that Council approve index-based rate increases for Mid Valley and Allied for CSW services in the City of Fresno.
BACKGROUND
In 2010, City staff planned and developed a CSW franchising system, procured contractors (Mid Valley and Allied), and negotiated two Multi-Family and Commercial Solid Waste Franchise Agreements. On September 29, 2011, Council awarded exclusive CSW franchise agreements to Mid Valley and Allied (Franchisees) to provide commercial solid waste services within the municipal corporate limits of the City. Mid Valley and Allied commenced commercial operations in the City of Fresno under their respective franchise agreements on December 5, 2011, providing CSW services for solid waste, recyclable materials, and organic materials generated at multi-family and commercial properties.
Contract Provisions for Annual Rate Adjustments
Both CSW franchise agreements allow for annual rate increases to account for changes in the consumer price index, fuels costs, and other related cost-of-service items. In order for a rate increase requests to be given consideration by the City, the Franchisees must submit an application requesting the rate increase by October of each year, with the effective date of the rate increase anticipated for January of the following year. The documentation required to be submitted by the Franchisees in their respective rate increase applications is defined in Article II of the CSW Agreement. The process for evaluating rate adjustments is determined using one of two methods: 1) an index-based adjustment, or 2) cost-based adjustment.
• The index-based adjustment, described in the Article II, Section 11.3 of the CSW Agreement involves use of various cost adjustment factors to calculate allowable rate increases.
• The cost-based adjustment, involves a detailed review of a Franchisee’s actual costs; provided however, the Operating Component portion of the rate increase does not exceed 3 percent for the Rate Period 3 (Calendar Year 2014) adjustment and 6 percent for any other Rate Period.
Attachment 2, as described in the Franchise Agreement, specifies when the two rate adjustment methods will be used.
Rate Adjustment History
Since the inception of the CSW Waste Franchise Agreements, four rate periods (Calendar Years) have passed (2012, 2013, 2014, and 2015) and 2016 will be Rate Period No. 5. Since the effective date of the Commercial Solid Waste Franchise Agreements, only one Rate Period has been approved for a rate increase - Rate Period No. 2 (Calendar Year 2013).
Both Mid Valley and Allied submitted the required rate-increase application documentation by October 1, 2012, to be considered for a rate increase for Rate Period No. 2 (Calendar Year 2013). As required by the CSW Franchise Agreements, City staff reviewed the submitted documentation and determined the calculated rate increase was in excess of 2.5 percent. However, the CSW Franchise Agreements include a provision that does not allow annual increases to exceed 2.5 percent in any given year, regardless of the magnitude of changes in the consumer price index, fuels costs, and other related cost-of-service items. Based on City staff findings, Allied accepted the rate increase allowance of 2.5 percent, and Allied’s new rates went into effect January 2013 (Rate Period 2). Alternatively, Mid Valley notified the City in September 2012 that it would not implement the allowable 2.5 percent rate increase, and requested the opportunity to defer implementation of the rate increase in a future Rate Period.
In October 2013, the City and the Franchisees agreed to adopt a two-year “rate freeze” for Rate Period 3 (Calendar Year 2014) and Rate Period 4 (Calendar Year 2015) and defer consideration of CSW rate increases until Rate Period No. 5 (Calendar Year 2016). Based on this mutual agreement, the Franchisees would be allowed to submit rate-increase application documents in October 2015.
Rate Period 5 Rate Increase Request
As specified in the CSW Franchise Agreement and as mutually-agreed October 2013, on October 1, 2015, both Mid Valley and Allied submitted applications and supporting documents for rate increases for Rate Period 5 (Calendar Year 2016), with rate increases to become effective January 2016. The CSW Agreement specifies that the rate increases for Rate Period 5 are to be set based on the Index Rate Adjustment methodology. The Index Rate Adjustment methodology provides for adjustments to each of the following four rate components:
1. Operating Component;
2. Disposal Component;
3. Processing Component; and
4. Fee Component.
Attachment 1.1 shows the recommended calculation adjustments to each of the rate components. Attachment 1.2, based on the adjusted rates, presents the recommended adjusted values for each of the customer rate component, effective January 2016, as compared to the currently-approved customer rates, that were effective January 2013.
Based on City staff findings, the allowable rate increase for Rate Period 5 for commercial solid waste services has been determined to be 1.40 percent for Mid Valley and 1.20 percent for Allied. Mid Valley has agreed to accept the allowable rate increase for Rate Period 5, and has requested to implement the 2.5 percent rate increase that was previously deferred for Rate Period 2, with the new rates scheduled to become effective February 2016. Allied has agreed to accept the allowable rate increase for Rate Period 5 and will implement a 1.20 percent rate increase effective February 2016.
Staff Recommendation
Based City staff review of the rate increase application documents provided by Mid Valley and Allied for Rate Period 5 (Calendar Year 2016), City staff recommends Council approve an allowable rate increase of 1.40 percent for Rate Period 5 for Mid Valley and 1.20 percent for Rate Period 5 for Allied.
1. Allied has communicated to City staff that it will implement the approved rate increase of 1.20 percent for Rate Period 5. The Allied rate increases will become effective February 2016.
2. Mid Valley has communicated to City staff that it will implement the approved rate increase of 1.40 percent for Rate Period 5, and implement the previously deferred rate increase of 2.5 percent from Rate Period 2. The Mid Valley rate increases will become effective February 2016.
ENVIRONMENTAL FINDINGS
Pursuant to CEQA Guidelines section 15378, this index based payment increase is not a “project”.
LOCAL PREFERENCE
Local preference was not applied because this index based payment increase is not a bid or award of a contract.
FISCAL IMPACT
The impact of the rate adjustment would generate approximately an additional $46,550 annually to the General Fund.
Attachments:
Attachment 1.1 - Adjustments to Rate Components (percent)
Attachment 1.2 - Recommended Adjusted Customer Rates
Attachment 2 - Rating Period Schedule
Attachment 3 - R3 Consulting Group Review and Recommendation Report for Mid Valley
Attachment 4 - R3 Consulting Group Review and Recommendation Report for Allied