Managing Tomorrow’s Resources Today
590 Ygnacio Valley Road, Suite 105
Walnut Creek, California 94596
Telephone: 925/977-6950
www.hfh-consultants.com
November 10, 2023
Ms. Lisa Petersen
Director of Public Works
City of Pacifica
170 Santa Maria Avenue
Pacifica, CA 94044-2506
Subject: Review of Recology of the Coast’s 2024 Rate Application Reference Number: S6069
Dear Ms. Petersen:
HF&H Consultants, LLC (HF&H) was retained by the City of Pacifica (City) to assist with a review of Recology of the Coast’s (Recology) request for a 6.00% increase to customer rates, effective January 1, 2024 (Application), submitted to the City. Recology’s Application also includes a roll-over of 3.74% to be applied to rates effective January 1, 2025, as their calculated costs for 2024 have increased a total of 9.74%; however, the franchise agreement with the City caps annual rate increases at 6.00%.
This report presents our findings and recommendations and is organized into four sections:
• Executive Summary;
• Background;
• Summary and Recommendations; and,
• Rate Adjustment Calculation.
EXECUTIVE SUMMARY
Based on our review of the Application performed in accordance with procedures in Section 11.03.A.2 of the agreement between the City and Recology dated February 8, 2010 (Agreement)1 and subsequent amendments, HF&H determined that a total increase of 5.86% to Recology’s total compensation is necessary to compensate Recology for its allowable expenses, effective January 1, 2024. Since the recommended rate increase is less than the 6.00% cap on annual rate adjustments, there will be no rollover to future rate years. Attachment 1 to this report summarizes the recommended 2024 rates, which reflects a 5.86% increase to 2023 rates and will become effective January 1, 2024.
We believe this 5.86% increase is reasonable based on the following:
1 The Agreement was subsequently amended by Resolution No. 67-2016 to extend the term through December 31, 2022 and amended by Resolution No. 69-2022 to include new services required to be provided by SB 1383 and extend the term through December 31, 2032
ATTACHMENT 2
Managing Tomorrow’s Resources Today
Ms. Lisa Petersen
November 10, 2023
• It is arrived at through an independent analysis conducted in accordance with the procedures in the Agreement and all amendments; and,
• Projected costs for 2024 based on the change in various Bay Area consumer price indices (CPI), which have been applied to Recology’s allowable 2023 compensation, in accordance with the Agreement.
The following table summarizes the components of the recommended 5.86% rate adjustment:
Table 1:
Rate Adjustment Components
Operating Expenses:
Labor Costs 1.66%
Vehicle-Related Costs 0.22%
Fuel 2.05%
Organics Processing 0.35%
Lease Costs 0.00%
Other Costs 0.68%
Total Operating Expenses 4.96% a
Profit 0.55% b
Pass-through Costs:
City Fees 0.35%
Recyclable Processing 0.08%
Disposal -0.07%
Total Pass-through Costs 0.36% c
Total Recology Compensation 5.86% =a+b+c
Managing Tomorrow’s Resources Today
Ms. Lisa Petersen
November 10, 2023
BACKGROUND
In accordance with Section 11.02 of the Agreement, Recology’s compensation was set for 2023 based on the maximum allowable rates agreed to by the City and Recology. In accordance with Section 11.02.D of the Agreement, subsequent rate adjustments shall be adjusted annually commencing in 2024, through the remaining term of the Agreement, including any extension periods, and shall be determined using one of two methodologies: (1) an index-based adjustment; or, (2) a cost-based adjustment (detailed rate review).
Index-based methodology adjustments are intended to adjust the revenue requirement by increasing or decreasing specific line-item costs by related indices to ensure the total compensation to Recology is reflective of the actual costs to provide services, without completing a full review or audit of Recology’s financials on an annual basis. The cost-based methodology involves a review of Recology’s actual cost of operations and operational statistics (e.g., staffing levels, routes, route hours, customers and their service levels) to determine the actual allowable total annual cost of operations for the most-recently completed rate year to forecast Recology’s allowable costs. The intent of performing the cost-based adjustment is to examine the actual costs to serve the City’s rate payers, instead of relying on Recology’s original proposed costs and takes into consideration the impacts of changes in inflation, deflation, number of customers, and the service levels of each customer.
Table 3 summarizes the methodologies to be used during each year as prescribed in the Agreement. For 2024, Recology submitted a rate application using the index-based methodology. HF&H reviewed Recology’s application and proposed changes resulting in a 5.86% rate increase, effective January 1, 2024.
For 2024, Recology submitted its rate application using the index-based method. This report documents our review of Recology’s rate application, including our findings and recommended rate increase.
Table 3:
Rate Setting Methodology Schedule
SUMMARY AND RECOMMENDATION
Recology’s compensation calculations for 2024 was submitted on October 2, 2023. Recology calculated its compensation requirement for 2024 to be $12,033,223, a 9.74% increase from 2023. Based on our Calendar Year Effective Date Adjustment Method
2023 January 1, 2023 Not Applicable
2024 January 1, 2024 Index-Based
2025 January 1, 2025 Index-Based
2026 January 1, 2026 Cost-Based
2027 January 1, 2027 Index-Based
2028 January 1, 2028 Index-Based
2029 January 1, 2029 Cost-Based
2030 January 1, 2030 Index-Based
2031 January 1, 2031 Index-Based
2032 January 1, 2032 Cost-Based
Managing Tomorrow’s Resources Today
Ms. Lisa Petersen
November 10, 2023
review and adjustments (agreed upon by Recology management and the City) to Recology’s Application, HF&H determined a 5.86% increase is necessary to compensate Recology for its allowable expenses for 2024. Table 3 summarizes Recology’s and HF&H’s rate adjustment calculations, a detailed discussion of our review and recommended adjustments follows the limitations sections below.
Table 3:
Summary of Rate Increase
Limitations
Our review was 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 do not express such an opinion.
Our conclusions are based on the review of Recology’s projections of its financial results of operations.
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.
Recology HF&H
Rate Proposed Revised
Application Adjustments Application
Total 2024 Expenses a $12,033,223 ($425,295) $11,607,928 2023 Compensation b $10,965,167 $10,965,167
2024 Increase in Expenses c=a-b $1,068,055 $642,760
Rate Adjustment d=c÷b 9.74% 5.86%
Managing Tomorrow’s Resources Today
Ms. Lisa Petersen
November 10, 2023
RATE ADJUSTMENT CALCULATION
The following table summarizes HF&H’s proposed adjustments to Recology’s requested 2024 rate adjustment.
Table 4
Adjusted 2024 Rate Application
Recology’s Compensation for Rate Year Ten
HF&H Scope of Work
The City engaged HF&H to perform a review of the Application in accordance with Section 11.03(B) of the Agreement. HF&H staff performed this review based upon procedures agreed upon by the City and HF&H, as documented in our proposal dated September 20, 2023, and upon the Agreement between the City and Recology. These procedures included the following tasks:
Recology HF&H
Rate Proposed Revised
Application Adjustments Application
Operating Expenses:
Labor Costs $4,936,209 $4,936,209
Vehicle-Related Costs $417,276 $417,276
Fuel $846,740 $846,740
Organics Processing $660,137 ($382,766) $277,372
Lease Costs $751,225 $751,225
Other Costs $1,428,604 $1,428,604
Total Operating Expenses $9,040,192 ($382,766) $8,657,426 Profit $1,004,466 ($42,530) $961,936
Pass-through Costs:
City Fees $948,837 $948,837
Recyclable Processing $99,980 $99,980
Disposal $939,748 $939,748
Total Pass-through Costs $1,988,565 $1,988,565
Total 2024 Expenses a $12,033,223 ($425,295) $11,607,928 2023 Compensation b $10,965,167 $10,965,167
2024 Increase in Expenses c=a-b $1,068,055 $642,760
Rate Adjustment d=c÷b 9.74% 5.86%
Managing Tomorrow’s Resources Today
Ms. Lisa Petersen
November 10, 2023
Task 1: Preliminary Application Review
1a. Reviewed Recology’s Application for completeness and compliance with the procedures contained in Article 11 and Attachment K of the Agreement.
1b. Reviewed Recology’s Application for mathematical accuracy and logical consistency to determine that the Application was mathematically correct, that the rows and columns of numbers add down and across as intended, and that the stated assumptions were in fact used in the 2024 compensation calculation. Determined that the Application was internally consistent and that any summary schedules agreed to the supporting schedules and worksheets. 1c. Determined what information still needed to be acquired and sent a request for additional information to Recology.
Task 2: Expense Review
2a. Reviewed the calculation of indexed expenses to determine if the proper index was used for each cost-type. For example, determined whether the proper fuel index was used to adjust fuel costs and that the percentage change in the fuel index was properly calculated; determined whether the percentage change in the union wage rates were properly calculated and applied to the proper labor costs, etc.
2b. Reviewed projected organic material processing costs, recyclable material processing costs, and disposal cost, including tonnage assumptions and rate per the Agreement. We determined whether Recology’s application properly used the actual tons processed for the twelve-months ending April 2023 to project processing costs for the forthcoming rate year (in accordance with the Agreement). 2c. Reviewed Recology’s calculation fees owed to the City. 2d. Reviewed Recology’s calculation of allowable profit.
Task 3: Rate Adjustment Factor Calculation
3a. Recalculated the Rate Adjustment Factor in accordance with Section 4.6 of Attachment K.
Findings
Recology’s calculated contractor’s compensation for 2024 was $12,033,223. In accordance with the City’s request, HF&H reviewed Recology’s calculations. We revised the compensation calculations to conform to procedures specified by the Agreement as described below. The final recommended 2024 contractor’s compensation is $11,607,928, a 5.86% increase from 2023. Our findings are based on our review as described below:
Managing Tomorrow’s Resources Today
Ms. Lisa Petersen
November 10, 2023
Step 1: Verification of the Mathematical Accuracy
HF&H reviewed Recology’s Application to determine completeness, mathematical accuracy, reasonableness, and logical consistency of the assumptions supporting the projected revenues and expenses. This included:
• Verification that all cost indices used to project expenses conformed to Attachment K of the Agreement.
• Verification of the mathematical accuracy of Recology’s compensation adjustment calculations. • Verification of the consistency and integrity of the spreadsheets housing calculations.
Findings
In an index-based rate adjustment year, Attachment K of the Agreement requires the calculation of the annual percentage change in the Consumer Price Indices (CPI). In the Application, Recology correctly calculated the annual change in CPIs to estimate projected RP3 costs, except the pension costs and the fuel costs. The impact of these calculations is further described in Step 3 below.
Step 2: Determine Current Cost Components
As required by Attachment K of the Agreement, we found that Recology correctly used the City-approved 2023 cost components (e.g., labor-related costs, vehicle-related costs, fuel) as the starting point for calculating their 2024 allowable compensation.
Step 3: Adjust Each Cost Component
Labor-Related Costs
In accordance with Sections 3.3.1, 3.3.2, 3.3.3, and 3.3.4 of Attachment K, labor-related costs shall be calculated by adjusting costs in accordance with the procedures described in the then-current collective bargaining agreement (CBA). Recology properly applied to appropriate percent changesto their allowable labor expenses. No adjustment recommended.
Vehicle-Related Costs (Excluding Fuel)
Section 3.3.5 of Attachment K states that projected vehicle-related costs for 2024 shall equal the allowable vehicle-related costs approved for 2023, multiplied by one plus the percentage change in the Motor Vehicle Related Index, All Urban Consumers, and U.S. City Average. In the Application, Recology projected vehicle-related costs using the correct methodology. No adjustment recommended.
Managing Tomorrow’s Resources Today
Ms. Lisa Petersen
November 10, 2023
Fuel Costs
Section 3.3.6 of Attachment K states that projected fuel costs for 2024 shall equal the allowable fuel costs approved for 2023, multiplied by one plus the percentage change in the PPI – Fuel Pricing Index. In the Application, Recology projected fuel costs using the correct methodology. No adjustment recommended.
Organics Processing Costs
Attachment K of the Agreement states that Organics Processing Costs for 2024 shall equal (i) the Base Component of the Organics Processing Fee for the current Rate Year multiplied, which shall be $48.77 for 2023, by one (1) plus the Annual Percentage Change in the CPI-U plus the sum of the then-current (or known future) Regulatory Fees, multiplied by (ii) the total Tons of Organic Materials Collected by Contractor for the most-recently completed 12-month period ending April 30. Recology properly projected Organic Material tons collected but multiplied by a tipping fee of $122.42 instead of the proper $51.44 per ton ($48.77 x 1.0547). The higher tipping fee overstated the allowable 2024 Organic Processing costs by $70.98 per ton ($122.42 - $51.44). Therefore, we recommend a decrease to Recology’s allowable 2024 Organic Materials Processing costs of $382,766.
Lease Costs
Attachment K of the Agreement states that Lease Costs shall be fixed for all years during the Agreement.
Recology properly included $751,225 in Lease Costs, no adjustment recommended.
Other Costs
Attachment K of the Agreement states that projected other costs for the coming rate year shall equal the allowable other costs approved in 20023 multiplied by one plus the percentage change in the CPI-U. In the Application, Recology projected other costs using the correct methodology. No adjustment recommended.
Profit
HF&H found that Recology correctly calculated its allowable profit by applying a 90% operating ratio to its allowable operating costs; however, due to the recommended adjustment to Organic Material Processing costs described above, we recommend a $42,530 decrease to Recology’s allowable 2024 profit.
Pass-through Costs
Attachment K of the Agreement states City fees and other pass-through costs (e.g., disposal and recyclable material processing costs) shall be adjusted by various indices. Recology properly calculated the pass-through costs in accordance with Attachment K; therefore, no adjustment is recommended.
Managing Tomorrow’s Resources Today
Ms. Lisa Petersen
November 10, 2023
Step 4: Calculate the Rate Adjustment Factor
Table 4 summarizes Recology’s requested revenue requirement of $12,033,223 to provide current franchised services for 2024 and HF&H’s adjusted revenue requirement, based on our recommended adjustments to the Application described above. We have determined that a total revenue requirement of $11,607,928 (a decrease of $425,295 from Recology’s Application) is appropriate and a recommended
5.86% increase to current rates is consistent with the rate-setting methodology described in Attachment K of the Agreement. Section 11.03(A)(3) of the Agreement states that the rate adjustment factor calculated pursuant to Attachment K may not exceed 6.00%. In the event the calculation results in a calculated increase exceeding 6.00%, the Contractor will accept an increase of no more than 5.00% and the amount exceeding the 6.00% shall be reflected as an “Other Adjustment” in the next scheduled rate adjustment (“roll-over”). Because the 5.86% HF&H adjusted Rate Adjustment Factor is less than 6.00%, there is no roll-over to the next rate year (i.e., 2025). As such, Attachment 1 in this report summarizes the recommended 2024 rates, which reflects a 5.86% increase to 2023 rates and will become effective January 1, 2024.
* * * * *
We would like to express our appreciation to Recology’s management and staff for their assistance. In addition, we express our appreciation to you for your assistance and guidance during the course of the review. Should you have any questions, please contact me directly at 925/977-6957 or rsimonson@hfhconsultants.com.
Sincerely,
HF&H CONSULTANTS, LLC
Rick Simonson
Senior Vice President
2024
2023 Adjustment 2024
Rates Factor Rates
Single-Family Residential Service
One time additional 32 gallon bag $10.17 5.86% $10.77
Each additional gallon over 32 per pick up $1.78 5.86% $1.88 Mini can 20 gallons or less (20 gallon can) $29.18 5.86% $30.89 32 gallon Cart $45.04 5.86% $47.68
48 gallon Cart $66.97 5.86% $70.89
64 gallon Cart $88.95 5.86% $94.16
96 gallon Cart (acknowledged by City) $132.84 5.86% $140.62 Extra Recycling Cart $4.15 5.86% $4.39
Extra Organic Materials Cart $4.15 5.86% $4.39
Residential service rates are for solid waste container sizes and include costs for recyclables and organics materials collection service.
Commmercial Solid Waste Bin Collection Service
Commercial container rentals
1 cubic yard $76.33 5.86% $80.80
2 cubic yards $89.01 5.86% $94.23
Commercial container pick up for Solid Waste
1 cubic yard $69.98 5.86% $74.08
2 cubic yards $101.78 5.86% $107.74
Compacted commercial container pick up for Solid Waste
1 cubic yard $103.01 5.86% $109.05
2 cubic yards $177.11 5.86% $187.49
Commercial container pick up for Organics
1 cubic yard $114.47 5.86% $121.18
2 cubic yards $196.76 5.86% $208.29
Commmercial Can/Cart Solid Waste Pick Up
Each additional gallon over 32 $2.59 5.86% $2.74
32 gallon Cart $50.87 5.86% $53.85
48 gallon Cart $76.27 5.86% $80.74
64 gallon Cart $96.32 5.86% $101.96
96 gallon Cart $152.56 5.86% $161.50
Commmercial Can/Cart Organics Pick Up
32 gallon Cart $45.78 5.86% $48.46
48 gallon Cart $68.66 5.86% $72.68
64 gallon Cart $91.55 5.86% $96.91
96 gallon Cart $137.32 5.86% $145.37
ATTACHMENT A - 2024 RATES
2024
2023 Adjustment 2024
Rates Factor Rates
Debris Box Solid Waste and Construction and
Demolition Debris Collection
14 yard container (7 days) $646.08 5.86% $683.94
Each additional day $53.06 5.86% $56.17
20 yard container (7 days) $832.37 5.86% $881.15
Each additional day $74.50 5.86% $78.87
Miscellaneous Single-Family Services
Service from side or rear of house $7.42 5.86% $7.85
Return pick up charge $12.83 5.86% $13.58
Special call for large items charge by charge by
volume volume
Extra charge for collection private driveways:
1 to 30 feet no charge no charge
Over 30 feet (for every 10 feet or part thereof) $7.42 5.86% $7.85 Life line rates (available only for 20 gallon Cart Customers $27.39 5.86% $29.00 Single Family return trip charge (i.e. provision $20.76 5.86% $21.98 of collection service after the regularly
scheduled collection day) per event
Miscellaneous Commercial and Multi-Family
Recycling services provided to commercial and no charge no charge multi-family customers
Distance charge for MFD and commercial
accounts for container size of 3 cubic yards or less:
Within fifty (50) feet of access by Contractor's collection no charge no charge vehicle
51 feet or more from access by Contractor's no charge no charge collection vehicle
Distance charge for MFD and commercial
accounts for container size larger than 3 cubic yards
or less:
0 to fifty (50) feet of access by Contractor's collection no charge no charge vehicle
51 feet or more from access by Contractor's no charge no charge collection vehicle
Extra pick up charge for MFD and commercial charge by charge by customers (charge per collection event) volume volume
Lock purchase fee (one time charge; replacement at $23.54 5.86% $24.92 no additional charge)
Key service (unlock and relock bin). Monthly charge $13.15 5.86% $13.92 based on once per week service
Container steam cleaning (or clean container exchange) $117.68 5.86% $124.58 Bin or debris box
Fee to collect contaminated Targeted Recyclable $29.59 5.86% $31.32 Materials or Organic Materials (per container)
ATTACHMENT A - 2024 RATES