HE H CONSULTANTS, LLC
Managing Tomorrow's Resources Today
590 Ygnacio Valley Road, Suite 105, Walnut Creek, CA 94596 Northern California Telephone: (925) 977-6950 Southern California
www.hfh-consultants.com
November 15, 2024
John Mullins
Interim Director of Public Works
City of Pacifica
170 Santa Maria Avenue
Pacifica, CA 94044
Subject: Review of Recology of the Coast's 2025 Rate Application (Rate Year 16) Reference Number: S6088
Dear John Mullins:
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 5.13% increase to customer rates, effective January 1, 2025 (Application), submitted to the City.
This report presents our findings and recommendations and is organized into four sections:
Executive Summary
• Background
• Summary and Recommendations
• 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) and subsequent amendments, HF&H determined that a total increase of 5.09% to Recology's total compensation is necessary to compensate Recology for its allowable expenses, effective January 1, 2025. Since the recommended rate increase is less than the 6.00% cap on annual rate adjustments, there will be no roll- over to future rate years. Attachment 1 to this report summarizes the recommended 2025 rates, which reflects a 5.09% increase to 2024 rates and will become effective January 1, 2025.
We believe this 5.09% increase is reasonable based on the following:
• It is arrived at through an independent analysis conducted in accordance with the procedures in the Agreement and all amendments; and,
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
HF H CONSULTANTS, LLC
Managing Tomorrow's Resources Today
John Mullins
November 15, 2024
Projected costs for 2025 are based on the change in various Bay Area consumer price indices (CPI), which have been applied to Recology's allowable 2024 compensation, in accordance with the Agreement.
I he following table summarizes the components of the recommended 5.09% rate adjustment:
Table 1:
Rate Adjustment Components
Operating Expenses:
Labor Costs 1.49%
Vehicle-Related Costs 0.22%
Fuel -1.92%
Organics Processing 3.09%
Lease Costs 0.00%
Other Costs 0.37%
Total Operating Expenses 3.24% a
Profit 0.36% b
Pass-through Costs:
City Fees 0.19%
Recyclable Processing 0.41%
Disposal 0.89%
Total Pass-through Costs 1.49% c
Total Rate Adjustment 5.09% =a+b+c
HF. H CONSULTANTS, LLC
Managing Tomorrow's Resources Today
John Mullins
November 15, 2024
BACKGROUND
In accordance with Section 11.02 of the Agreement, Recology's compensation was set for 2024 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 2025, 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 lo serve the City's rate payers, instead of relying on Recology's original proposed costs and takes into consideration the impacts of the actual changes in inflation, deflation, number of customers, and the service levels of each customer.
Table 2 summarizes the methodologies to be used during each rate year as prescribed in the Agreement.
For 2025, Recology submitted their Application using the index-based methodology, as prescribed in the Agreement. HF&H reviewed Recology's Application and proposed changes resulting in a 5.09% rate increase, effective January 1, 2025. This report documents our review of Recology's Application, including our findings and recommended rate increase.
Table 2:
Rate Setting Methodology Schedule
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
SUMMARY AND RECOMMENDATION
Recology's compensation calculation for 2025 was submitted in September 2024. Recology calculated its compensation requirement for 2025 to be $12,203,560, a 5.13% increase from 2024. Based on our review
HF H CONSULTANTS, LLC
Managing Tomorrow's Resources Today
John Mullins
November 15, 2024
and adjustments (agreed upon by Recology management and the City) to Recology's Application, HF&H determined a 5.09% increase is necessary to compensate Recology for its allowable expenses for 2025.
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
Recology HF&H
Rate Proposed Revised
Application Adjustments Application
Total 2025 Expenses a $12,203,560 ($4,931) $12,198,629
2024 Compensation b $11,607,928 $11,607,928
2025 Increase in Expenses c=a-b $595,632 $590,701
Rate Adjustment d=c+b 5.13% 5.09%
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.
HF H CONSULTANTS, LLC
Managing Tomorrow's Resources Today
John Mullins
November 15, 2024
RATE ADJUSTMENT CALCULATION
The following table summarizes HF&H's proposed adjustments to Recology's requested 2025 rate adjustment.
Table 4:
Adjusted 2024 Rate Application
Recology HF&H
Rate Proposed Revised
Application Adjustments Application
Operating Expenses:
Labor Costs $5,113,871 ($4,438) $5,109,433
Vehicle-Related Costs $442,312 $0 $442,312
Fuel $624,048 $0 $624,048
Organics Processing $635,782 $0 $635,782
Lease Costs $751,225 $0 $751,225
Other Costs $1,471,034 $0 $1,471,034
Total Operating Expenses $9,038,271 ($4,438) $9,033,833 Profit $1,004,252 ($493) $1,003,759
Pass-through Costs:
City Fees $971,077 $971,077
Recyclable Processing $147,303 $147,303
Disposal $1,042,655 $1.042,655
Total Pass-through Costs $2,161,036 $2,161,036
Total 2025 Expenses a $12,203,560 ($4,931) $12,198,629
2024 Compensation b $11,607,928 $11,607,928
2025 Increase in Expenses c=a-b $595,632 $590,701
Rate Adjustment d=c÷b 5.13% 5.09%
Recology's Compensation for Rate Year 16
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 5, 2024, and upon the Agreement between the City and Recology. These procedures included the following tasks:
HF. H CONSULTANTS, LLC
Managing Tomorrow's Resources Today
John Mullins
November 15, 2024
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.
Reviewed Recology's Application for mathematical accuracy and logical consistency to determine that the Application was mathematically correct, the rows and columns of numbers add down and across as intended, and the stated assumptions were in fact used in the 2025 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 the disposal/processing rates per the Agreement.
We determined whether Recology's Application properly used the actual tons processed for the twelve-months ending April 2024 to project disposal/processing costs for the forthcoming rate year (in accordance with the Agreement).
2d. Reviewed Recology's calculation fees owed to the City. 2d. Reviewed Recology's calculation of allowable profit.
Task 3: Rate Adjustment Factor Calculation
За. Recalculated the Rate Adiustment Factor in accordance with Section 3.8 of Attachment K.
Findings
Recology's calculated contractor's compensation for 2025 was $12,203,560. 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 2025 contractor's compensation is $12,198,629, a 5.09% increase from 2024. Our findings are based on our review as described below:
HF H CONSULTANTS, LLC
Managing Tomorrow's Resources Today
John Mullins
November 15, 2024
Step 1: Verification of 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 RY 16 costs.
Step 2: Determine Current Cost Components
As required by Attachment K of the Agreement, we found that Recology correctly used the City-approved 2024 cost components (e.g., labor-related costs, vehicle-related costs, fuel) as the starting point for calculating their 2025 allowable compensation except for the RY 15 Health and Welfare RSP, which is further described below in Step 3.
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 changes to their allowable labor expenses, however Recology started with an incorrect Health and Welfare RSP amount for RY 15 of 831.91 instead of 865.19. The incorrect starting point overinflated the RSP component of the labor-related cost increase. Therefore, we recommend a decrease to Recology's allowable 2025 Labor-Related Costs of $4,438.
Vehicle-Related Costs (Excluding Fuel)
Section 3.3.5 of Attachment K states that projected vehicle-related costs for 2025 shall equal the allowable vehicle-related costs approved for 2024, 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 is recommended.
HF H CONSULTANTS, LLC
Managing Tomorrow's Resources Today
John Mullins
November 15, 2024
Fuel Costs
Section 3.3.6 of Attachment K states that projected fuel costs for 2025 shall equal the allowable fuel costs approved for 2024, 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 is recommended.
Organics Processing and Transfer/Transport Costs
Attachment K of the Agreement states that Organics Processing Costs for 2025 shall equal (i) the Base Component of the Organics Processing Fee for the current Rate Year multiplied, which is $51.44 for 2024, by one plus the Annual Percentage Change in the CPI-U plus the sum of the then-current (or known future) Kegulatory Fees, multiplied by (ii) the total Ions of Organic Materials Collected by Contractor for the most- recently completed 12-month period ending April 30. Because commercial organic material is no longer accepted at the current organics processing facility (South Valley Organics) it is now being delivered to the South Bay Waste Management Authority (SBWMA). This facility charges a higher rate of $196.50 per ton.
In the Application, Recology separated out the organic tonnage by customer class (residential and commercial) and applied the applicable per ton rate. No adjustment is recommended.
Delivery of organic matcrial to South Vallcy Organics requires transfer at the San Bruno transfer station.
In RY 15, the City and Recology agreed to delay the inclusion of transfer/transport costs for organic material until RY 16 in order to keep the RY 15 rate below 6.00%. Therefore, this is the first year in which the organics transfer/transport are included in the rates. In the Application, Recology multiplied the total tons of material transferred/transported in the most-recently completed 12-month period ending April 30 by the per ton transfer or transport rate for recyclable materials for RY 16 as recyclable materials is also transferred / transported through the San Bruno transfer station. No adjustment is recommended.
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 is 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 20024 multiplied by one plus the percentage change in the CPI-U. In the Application, Recology projected other costs using the correct methodology. No adjustment is 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 Labor-Related costs described above, we recommend a $493 decrease to Recology's allowable 2025 profit.
HF H CONSULTANTS, LLC
Managing Tomorrow's Resources Today
John Mullins
November 15, 2024
Pass-Through Costs - City Fees
Attachment K of the Agreement states City fees shall be adjusted by either the percentage change in the CPI-U, or the amount specified by the City in accordance with Article 10 of the Agreement. Recology properly calculated the City fees, and the City did not indicate other adjustments to the City Fees; therefore, no adjustment is recommended.
Pass-Through Costs - Disposal and Recyclable Processing Attachment K of the Agreement states recyclable material processing costs shall be adjusted by multiplying the base components of the per ton rate by the percentage change in the CPI-U, adding back regulatory fees, and then applying the new per ton rate to the total tons of material collected for the most recently completed twelve month period (May 2023 to April 2024). Attachment K also states disposal costs shall be calculated by the upcoming per-ton disposal fee multiplied by the total tons of solid waste collected for the most recently completed twelve month period. HF&H reviewed Recology's calculations of the per ton rate increases, recalculated tonnage reports, and examined weight tickets to ensure Recology correctly calculated the pass-through costs attributed to the City. Based on HF&H's review, Recology properly calculated the pass-through costs in accordance with Attachment K. No adjustment is recommended.
Pass-Through Costs - Construction & Demolition
As requested by the City, Recology began delivering C&D debris boxes to the Blue Line Transfer Station instead of Ox Mountain in order to meet CalGreen requirements. Due to the City-directed change in C&D processing locations, Recology is requesting an adjustment to the C&D debris box rates independent from the compensation methodology (i.e., the C&D debris box rates are not increasing by the 5.09% as other rates are), as shown in Table 5. The greater than 5.09% rate increase to C&D debris box rates reflect the additional drive time necessary to reach Blue Line Transfer Station, and the higher processing costs at Blue Line Transfer Station, compared to Ox Mountain.
Table 5:
Recology Proposed C&D Debris Box Rates for 2025
Size Cost Max Wt. Excess weight charge Extra Day
$893.77 clean fill n/a $56.17
15yd $828.58 2 tons $223 per ton $56.17
20yd $1,051.58 3 tons $223 per ton $70.21
30yd $1,497.58 5 tons $223 per ton $98.29
40yd $1,943.58 7 tons $223 per ton $127.78
HF&H reviewed the proposed rates for reasonableness and determined that the excessive weight charge should be reduced. Recology resubmitted C&D rates in which both the C&D base haul rate and the 2 State-mandated green building code found in California Code of Regulations, Title 24, Part 11.
HF H CONSULTANTS, LLC
Managing Tomorrow's Resources Today
John Mullins
November 15, 2024
excessive weight charge were reduced, as well as the extra day charge was averaged across sizes. Refer to Table 6 below for the agreed-upon C&D rates.
Table 6:
Recology Agreed-Upon C&D Debris Box Rates for 2025
Size Cost Max Wt. Excess weight charge Extra Day
9yd $848.19 clean fill $200.21 per ton $70.21
15yd $783.00 2 tons $200.21 per ton $70.21
20yd $983.21 3 tons $200.21 per ton $70.21
30yd $1,383.63 5 tons $200.21 per ton $70.21
40yd $1,784.05 7 tons $200.21 per ton $70.21
For RY 16, the recommended C&D debris box rates are included in the final rate sheet (Attachment A).
For RY 17 and beyond, the Application should continue to adjust the C&D component of the rates using the prior year's excess weight charge per ton rate multiplied by the percentage change in the CPI.
Grit and Screenings Collection
The third amendment to the Agreement, effective in October 2024, requires Recology to collect and dispose of grit and screenings from the City's sewage treatment plant and dump stations at Ox Mountain Sanitary Landfill. All tons associated with this service shall be paid directly by the City and shall not be funded through the annual rate setting methodology. In RY 17 and beyond, the Application should not include tonnage for grit and screening disposal in pass-through costs. Because the service was not performed during the period under review for tonnage, no adjustment Is required during RY 16.
Step 4: Calculate the Rate Adjustment Factor
Table 4 summarizes Recology's requested revenue requirement of $12,203,560 to provide current franchised services for 2025 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 $12,198,629 (a decrease of $4,931 from Recology's Application) is appropriate and a recommended
5.09% 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 5.09% HF&H adjusted Rate Adjustment Factor is less than 6.00%, there is no roll-over to the next rate year (i.e., 2026). As such, Attachment 1 in this report summarizes the recommended 2025 rates, which reflects a 5.09% increase to 2024 rates and will become effective January 1, 2025.
HF H CONSULTANTS, LLC
Managing Tomorrow's Resources Today
John Mullins
November 15, 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@hh- consultants.com.
Sincerely,
HF&H CONSULTANTS, LLC
Liked simone
Rick Simonso
Senior Vice President
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ATTACHMENT A - 2025 RATES
2025
2024 Adjustment 2025
Rates Factor Rates
Single-Family Residential Service
One time additional 32 gallon bag $10.77 5.09% $11.32
Each additional gallon over 32 per pick up $1.88 5.09% $1.98 Mini can 20 gallons or less (20 gallon can) $30.89 5.09% $32.46 32 gallon Cart $47.68 5.09% $50.11
48 gallon Cart $70.89 5.09% $74.50
64 gallon Cart $94.16 5.09% $98.95
96 gallon Cart (acknowledged by City) $140.62 5.09% $147.78 Extra Recycling Cart $4.39 5.09% $4.61
Extra Organic Materials Cart $4.39 5.09% $4.61
Residential service rates are for solld 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 $80.80 5.09% $84.91
2 cubic yards $94.23 5.09% $99.03
Commercial container pick up for Solid Waste
1 cubic yard $74.08 5.09% $77.85
2 cubic yards $107.74 5.09% $113.22
Compacted commercial container pick up for Solid Waste
1 cubic yard $109.05 5.09% $114.60
2 cubic yards $187.49 5.09% $197.03
Commercial container pick up for Organics
1 cubic yard $121.18 5.09% $127.35
2 cubic yards $208.29 5.09% $218.89
Commercial Can/Cart Solid Waste Pick Up
Each additional gallon over 32 $2.74 5.09% $2.88
32 gallon Cart $53.85 5.09% $56.59
48 gallon Cart $80.74 5.09% $84.85
64 gallon Cart $101.96 5.09% $107.15
96 gallon Cart $161.50 5.09% $169.72
Commercial Can/Cart Organics Pick Up
32 gallon Cart $48.46 5.09% $50.93
48 gallon Cart $72.68 5.09% $76.38
64 gallon Cart $96.91 5.09% $101.84
96 gallon Cart $145.37 5.09% $152.77
2025
2024 Adjustment 2025
Rates Factor Rates
Debris Box Solid Waste Debris Collection
14 yard container (7 days) $683.94 5.09% $718.75
Each additional day $56.17 5.09% $59.03
20 yard container (7 days) $881.15 5.09% $926.00
Each additional day $78.87 5.09% $82.88
Debris Box Construction and Demolition Debris Collection 9 yard container (7 days) - clean fill only $848.19
Each additional day $70.21
15 yard container (7 days) - Max. Weight 2 tons $783.00 Each additional day $70.21
Excess weight charge (per ton) $200.21
20 yard container (7 days) - Max. Weight 3 tons $983.21 Each additional day $70.21
Excess weight charge (per ton) $200.21
30 yard container (7 days) - Max. Weight 5 tons $1,383.63 Each additional day $70.21
Excess weight charge (per ton) $200.21
40 yard container (7 days) - Max. Weight 7 tons $1,784.05 Each additional day $70.21
Excess weight charge (per ton) $200.21
Miscellaneous Single-Family Services
Service from side or rear of house $7.85 5.09% $8.25
Return pick up charge $13.58 5.09% $14.27
charge by charge by
Special call for large items 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) $7.85 5.09% $8.25 Life line rates (available only for 20 gallon Cart Customers) $29.00 5.09% $30.48 Single Family return trip charge (i.e. provision $21.98 5.09% $23.10 of collection service after the regularly
scheduled collection day) per event
Miscellaneous Commercial and Multi-Family Services
Recycling services provided to commercial anc 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
2025
2024 Adjustment 2025
Rates Factor Rates
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 foot or more from accoss by Contractor's no chargo no chargo collection vehicle
charge by charge by
Extra pick up charge for MFD and commercial volume volume customers (charge per collection event)
Lock purchase fee (one time charge; replacement at $24.92 5.09% $26.19 no additional charge)
Key service (unlock and relock bin). Monthly charge $13.92 5.09% $14.63 based on once per week service
Container steam cleaning (or clean container exchange) $124.58 5.09% $130.92 Bin or debris box
Fee to collect contaminated Targeted Recyclable $31.32 5.09% $32.91 Materials or Organic Materials (per container)