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HomeMy WebLinkAboutItem 4.05 WasteMgtAlaCntyRpt (2) e e CITY OF DUBLIN AGENDA STATEMENT CITY COUNCIL MEETING DATE: October 10, 1994 SUBJECT: Informational Report on Submittal of 1995 and 1996 Waste Management of Alameda County, Inc. (WMAC) Garbage Rate Application (Prepared by: Lou Ann Riera-Texeira, Assistant to the city Manager and Paul S. Rankin, Assistant City Manager/Administrative Services Director) ~ EXHIBITS: Letter Dated August 15, 1994 from WMAC Transmitting the Rate Application /'J,liV RECOMMENDATION:~ Refer the Rate Application to the Joint Refuse Rate Review Committee (JRRRC) for Review FINANCIAL STATEMENT: Impact to the City of Dublin garbage rates will be determined upon completion of 1995 Rate Application review. DESCRIPTION: The City of Dublin, along with a majority of cities in Alameda County, contracts with Waste Management of Alameda County, Inc. (WMAC) for waste collection services. The company collects waste in the city of Dublin under a franchise agreement, which currently runs through March of 1996. The terms of the current agreement authorize the City Council to establish all garbage rates for services provided in the City of Dublin. The agreement also provides that the revenue derived from the company must cover their estimated expenses plus a reasonable rate of return. In August of 1994, WMAC submitted a two year rate application requesting an increase in garbage rates covering 1995 and 1996. The Rate Application is an integrated package encompassing landfill operations as well as waste collection/transfer components. As indicated in the attached letter, the 1995 Rate Application contains a number of major changes, including a new two-year rate setting process (previously one year) and elimination of the existing balancing account. At this time, it is not possible to provide a detailed review of the rate increase as it relates to the operations servicing the City of Dublin. companywide, the 1995 Rate Application proposes an average 13.4% rate increase for 1995 followed by an additional 3.6% rate increase for 1996. The company has requested a significant change to the methodology used to determine the allowed profit rate. In 1994, the City of Dublin allowed the company profit based on a ratio of pre-tax operating expenses (i.e., if a ratio of 90% were used and the company had pre-tax expenses of $100 million, the company would be allowed a profit of $10 million). The allowed Operating Ratio (OR) recommended in 1994 by the JRRRC and adopted by the City Council was 93.25%. This was estimated to be equivalent to a 4.3% after tax profit. . In the current rate application, the company proposes to use two different "Operating Ratios." For collection activities, they have proposed an OR of 88%; and for landfill operations, they have requested an OR of 71.5%. Approximately 8.1% of the 1995 requested rate increase results from proposed increases in profit and interest expense. The JRRRC consultant will need to evaluate in detail the methodologies being proposed as well as the basis for the request. On an annual basis, the Dublin City Council has reviewed garbage rates through a process undertaken by the Joint Refuse Rate Review Committee. This Committee is comprised of various jurisdictions serviced by WMAC. The Committee retains the services of an independent consultant to review and analyze the rate application. Staff recommends receiving the 1995 and 1996 Rate Application and referring the Application to the JRRRC for review and recommendations. CC: Dan Borges, Livermore Dublin Disposal Mary Evans, Waste Management of Alameda County, Inc. 4.5 ~ e ..e ~, Waste Management of Alameda count~, Inc. \~l Administrative Offices ~ 172 98th Avenue . Oakland, California 94603-1004 510/430-8509 . Fax: 510/562-7280 August 15, 1994 . Mr. .Gary Breaux, Chairman Joint Refuse Rate Review Committee 475 14th Street, 10th Floor Oakland, CA 94612 Dear Mr. Breaux: Attached is the technical submission of Waste Management of Alameda County's (WMAC) Rate Application for 1995 and 1996. This application is being submitted in compliance with Article 3, Section 2 of the jurisdictions' Franchise Agreements. This submission is prepared based on the direction received from the Joint Refuse Rate' Review Committee (JRRRC) directly and through its consultant. This letter summarizes some of the highlights of the rate application and the treatment of a variety of items. This rate application applies only to the years 1995 and 1996 and does not address any issues or concerns WMAC may have with the rates of return and operating ratios recommended by the JRRRC and adopted by its member jurisdictions in prior years. Integration of Rate Application Components The JRRRC has proposed several changes for regulation ofWMAC, including elimination of the balancing account and a two-year rate setting process. WMAC has been responsive to the JRRRC's wishes and developed this rate application to meet the JRRRC's goals while providing the Company with appropriate compensation for its operations. The rate application is an integrated .package - the components discusse.d below are inherently related, and a change in the treatment of one component will have necessary impacts on other components. Basis for Budget Submissions In the absence of direction from the JRRRC regarding a procedure for indexing the rates approved for 1995 to set 1996 rates, WMAC is submitting proposed budgets for both 1995 and 1996. Also included, for informational purposes only, is a draft projected budget for 1997. (See section marked "Technical Submission.") The 1995/1996 submission, including the treatment of costs associated with change in law and uncon- trollable circumstances, the risks assumed by WMAC, and the requested profitability are I I .1 I I I I I t I I I I I I I I I I I e e Page 2 tied to the adoption of these budgets by the JRRRC and the enaction of rate ordinances which will set rates for 1995 and 1996. The risk associated with changes in actual costs from those budgeted, except for those specific items identified below, and shortfalls in revenue other than those caused by jurisdiction failure to approve appropriate rate increases, will be borne by WMAC. Profitability I Waste Management of Alameda County requests allowed profitability be determined using separate operating ratios for collection/transfer operations and for disposal operations. This is consistent with the recommendations made by Barakat & Chamberlin in the position paper submitted to the JRRRC earlier this month. The requested profitability is consistent with the normal operational risks associated with waste management activities, the additional risks associated with the elimination of the balancing account, and the shifting of certain financial risk from the JRRRC members to WMAC. It also provides a fair and appropriate return on the capital .which WMAC h~s vested in the operations. Elimination of the Balancing Account The JRRRC has proposed the elimination of the balancing account for the use of accumulating deficits between actual revenues and actual expenses plus allowed profitability effective January, 1995. The outstanding balance as of December 31, 1994, will be fully reimbursed by the jurisdictions. WMAC's 1995/1996 rate application is prepared on a basis consistent with the JRRRC's proposal, and has adjusted profitability recommendations based on the additional risk associated with the elimination of the balancing account. The Company faces risks, however, that cannot be appropriately covered in the additional profitability requested. These include any costs or fees incurred as a result of changes in law or regulation and uncontrollable circumstances (as detailed in the Exhibits section of the rate application). WMAC proposes costs associated with these items in a given year be included in the following year's budget. Interest Treatment The JRRRC jurisdictions currently reimburse WMAC for interest expense at a rate of 5.76%. This is lower than market interest rates and does not adequately reflect the long- term nature of the capital expenditures as well as the balancing account amount. The rate application is based on the use of tWo separate interest rates: (1) for the outstanding balancing account, the weighted average cost of capital recommended by Arthur Andersen in their position paper, "and (2) for all other interest expense, 9.5%. e e Page 3 I I I I I I I I I I I I I I I I I I I Landfill Risks There are a number of specific risks associated with the operation of the Altamont Landfill which justify the profitability requested. These include the following: · Risks a.ssociated with closure and post-closure maintenance. The funding levels for closure/post-closure are based on current estimates. These estimates, while the best currently available, are revised annually, and may vary substantially from the actual cost of landfill closure/post-closure maintenance costs, both due to gene.ral increases in costs and the possibility of increased regulatory requirements enacted after the expiration of the franchises. · While WMAC has a commitment of waste streams from the JRRRC members, there is still substantial volume risk related to decreases in construction activity, and increased solid waste diversion activity (including recycling and green waste programs). · WMAC, like other landfill operations, is subject to the competitive market. While the JRRRC members have made waste stream commitments through their franchise terms, there is the possibility for significant competition from other facilities after the expiration of these agreements (including potential competition from the Alameda County Waste Management Authority). · There are risks which WMAC proposes be borne by the JRRRC members, including changes in law and regulation and uncontrollable circumstances. (See Exhibits section for more details.) This protection of WMAC, however, may only last as long as the franchise agreements. Therefore, our profitability today needs to reflect the potential liability which may ultimately stem from current operations and the need to protect and maintain the landfill site for a minimum of thirty years (30) beyond final closure. Capital Budget The submission includes the capital budget previously submitted to the JRRRC on June 15th. We have determined the changes proposed by the JRRRC do not materially affect this capital budget. I I I I I I I . I I I I . . e e Page 4 Performance Standards This technical submission is submitted in accordance with the requirements of our franchise agreements. We believe the changes proposed herein enhance our ability to manage the Company's operations in the most cost-effective way while consistently providing high quality service. WMAC will continue to comply with its contractual obligations by providing the JRRRC and its member with timely information and responsive customer service. We are prepared to work with the JRRRC and its consultants to develop a set of reasonable performance standards with which to evaluate customer service and our responsiveness to the jurisdictions' informational requirements. Key Assumptions The rate application is based on several assumptions related to labor costs, head count, and other operating and maintenance costs. These .are detailed further in the section entitled "Exhibits." In accordance with the Franchise Agreements, the 1993 Waste Management of Alameda County financial statements are enclosed. Waste Management of Alameda County is sensitive to the fact that elimination of the balancing account as well as other components of this rate application will result in very different rate adjustment requirements among the JRRRC's members. We are prepared to work with the individual jurisdictions to design an approach to rate setting and franchise management which will provide for fair and reasonable rate setting while providing quality, cost-effective service to our ratepayers. Sincerely, II '--2 D. David MacDonald Executive Vice President Vt[~^1 S--G~ Mary S. Evans Vice President & Controller I'. ., I . . DDMIMSElsd MSE94094.s Attachment cc: JRRRC Members Erik Gilberg, Deloitte &T0uche