DRAFT REPORT
City of San Pablo
Submitted electronically on October 22, 2020
submitted electronically: November 3, 2022
Review of Republic’s 2023 Rate Application
450 14th Street, Suite 350, Oakland, CA 94612 | p 916.782.7821 | f 916.782.7824 | www.r3cgi.com November 3, 2022
Ms. Karineh Samkian, Environmental Program Analyst
Public Works Department, City of San Pablo
13831 San Pablo Avenue, Building 3, San Pablo, CA 94806 submitted via email: [email protected]
SUBJECT: Draft Report – Review of Republic’s 2023 Rate Application
Dear Ms. Samkian,
R3 Consulting Group, Inc (R3) is pleased to submit this draft report to the City of San Pablo (City) to review Richmond Sanitary Service’s (Republic’s) rate adjustment application (Rate Application) for 2023 Base Year Rate Change (effective January 1, 2023).
R3 reviewed Republic’s Rate Application to confirm that:
It is mathematically accurate.
Expense and revenue projections are reasonable and in keeping with industry standards and address near-term market conditions.
Allocations between Republic franchise areas are appropriate.
It is consistent with applicable terms and conditions of the franchise agreement (Agreement).
The correct market indices were used.
R3’s review included the following steps:
Confirming that Republic provided the required information in keeping with industry standards and/or in accordance with the Agreement.
Confirming that expense and revenue projections are in keeping with industry standards and in accordance with the franchise agreement.
Verifying that Republic correctly calculated and applied the changes in applicable market indexes.
Verifying that Republic correctly calculated and applied the correct disposal expense projections.
Verifying that Republic correctly recalculated the maximum rates to reflect changes in expenses and revenues.
Making necessary corrections to Republic’s calculations and maximum rates and verifying the changes with City staff and Republic.
This draft report presents the results of our review.
* * * * * We appreciate the opportunity to be of service to the City. Should you have any questions regarding this draft report or need any additional information, please don’t hesitate to reach out directly.
Sincerely,
Jim Howison | Sr. Managing Consultant
R3 Consulting Group, Inc.
925.768.7244 | [email protected]
1. FINDINGS
City of San Pablo | Review of Republic’s 2023 Rate Applications Page 1 of 4 Background
Richmond Sanitary Service (Republic) has an exclusive franchise agreement (Agreement) with the City of San Pablo for the collection of solid waste, recyclables and organics. Pursuant to the Franchise Agreement between the City of San Pablo and Republic dated August 1986, and as amended, provide for a rate review in 2022, to establish rates for 2023.
The application contains the actual financial, cost, revenue, and operating information for the years 2020, 2021, and the first half of 2022 with projections through July 1 through December 31, 2022.Republic applied for an initial Base Year Rate Adjustment of 2.61%, before adjustments, to be effective January 1, 2023.
Rate Adjustment Requests & Recommendations
Republic’s requested 2023 rate increase was:
》 + 2.61%
Based on R3’s review, a 2.07% reduction in the rate application is being applied. The reduction is due to adjustments to allowable costs and an adjustment to the franchise fee, resulting in a revised rate increase:
》 + 0.62%
The above preliminary adjustments are based on the following changes to the application assumptions:
》 Adjustment downward to exclude travel costs of $1K.
》 Allowing financial statement audit fees of $3K.
》 Adjustment downward to franchise fee calculation of $28K due to overstatement in the original application.
Review Methodology
The Agreement does not specify a methodology for adjusting Base Year rates, including how to handle a number of relevant items including:
》 The level of profitability.
》 Expenses not subject to profit (i.e., pass-through expenses that are allowable but not subject to profit. Pass-through expenses may include solid waste disposal and recyclable material processing costs, franchise and other fees and other certain expenses). 》 Non-allowable expenses (e.g., fines and penalties, charitable or political donations, income taxes, employee free services, etc.).
The lack of a defined methodology for preparing the Base Year Rate Application was noted during prior Base Year Rate review process. For purposes of structuring its Rate Application, Republic used rate application forms from Contra Costa County’s Rate Adjustment Guidelines (Guidelines) for its Rate Application to the City.
Profit Level
The Agreement does not specify a target profit level (operating ratio) for Republic. Republic set its operating ratio at 88% (13.6% profit) and is the profitability level established in previous Rate Applications. The established profitability level is reasonable by industry standards.
City of San Pablo | Review of Republic’s 2023 Rate Applications Page 2 of 4 Non-Allowable Costs
As noted above, the Agreement does not address non-allowable costs, although doing so is common industry practice. As an example, Contra Costa County’s Rate Setting Manual specifies that the following costs are not allowed for rate setting, and as a result will not be passed on to the ratepayers:
》 Amortization of franchise purchases.
》 Charitable and political contributions.
》 Fines and penalties.
》 Income taxes.
》 Interest expenses.
》 Other costs on a case-by-case basis.
For the purposes of this review of the 2023 Rate Application, R3 applied past practices with respect to non-allowable costs for the Jurisdiction, resulting in disallowance of fines/other penalties, lobbyist fees, and travel expenses.
Revenue Adjustments
Republic calculated its residential revenues by multiplying the number of current customers at each service level (i.e., cart size) by the associated monthly rates. While this provides a good projection of residential monthly base rate revenues it does not account for residential revenues associated with extra services, fees or other residential revenue not accounted for in the monthly base rate revenue. We requested that Republic provide an accounting of residential revenue associated with special services, extra services, and/or charges or fees not included in the monthly base rate revenue and applied those revenues to the revenue calculations in the Rate Application.
Franchise Fee Adjustments
R3 reviewed Republic’s calculations of franchise fees in the Rate Application and made adjustments consistent with the descriptions for franchise fees (and other payments to the City) as noted below.
The 2013 Amendment; Section 5 states that franchise fees shall be calculated as follows: “…in an amount equal to the percent (10%) of gross revenues.” The Amendment also specifies that “For purposes of calculating gross revenues, Contractor shall not deduct the amount of franchise fee payments or any other business expense.” San Pablo’s fees in the Agreement further include $35,000 for a voucher program and annual “blight” payments.
Franchise Fee Evaluation
The City of San Pablo requested that R3 perform an incremental franchise fee analysis and the impact on the current rate increase. Table 1, following page, demonstrates the projected franchise fee rate increases set at 12%, 12.5%, 13.0%, and 13.5%.and the impact on projected rates.
City of San Pablo | Review of Republic’s 2023 Rate Applications Page 3 of 4 Table 1: Theoretical Rate Increases with Alternative Franchise Fee Amounts
Rate Comparisons
R3 performed a rate comparison on behalf of the City comparing five other jurisdictions to the City. Four of the jurisdictions are provided service by Republic and one by East Bay Sanitary, in El Cerrito. The projected residential rate for a 35-gallon cart is $37.58 in San Pablo compared to the average of $44.21.
The rates illustrated in Table 2 and Chart 1 are estimates as the collection Rate Application projects rates net of RecycleMore post-collection rates (formerly known as “IRRF fees”), which are set by RecycleMore, the West Contra Costa Integrated Waste Management Authority. Post-collection rates used in these calculations are estimates and subject to change based on decision of the RecycleMore Board of Directors.
Table 2: 35-Gallon Cart Monthly Rate Comparison
20-Gallon35-Gallon65-Gallon95-GallonCity of Richmond 36.92$ 45.20$ 85.29$ 126.59$ City of San Pablo 30.18 37.58 72.68 108.95 City of El Cerrito 45.97 60.13 119.40 N/ACity of Hercules 37.96 45.25 79.98 115.83 City of Pinole 34.57 41.98 74.89 108.97 Rodeo - UA 36.66 39.22 47.46 64.61 West Contra Costa - UA 32.30 40.11 76.92 114.30 Average Monthly Rate 36.37$ 44.21$ 79.52$ 106.54$ 2023 - Projected Rate ComparisonJurisdictions Chart 1Current Franchise Fee 10% of Gross Revenue Current Projected Projected Projected ProjectedTotal Pass Through Costs 4,407,494 4,407,494 4,407,494 4,407,494 4,407,494 Total Revenue 4,904,775 4,904,775 4,904,775 4,904,775 4,904,775 Net Surplus) (497,281) (497,281) (497,281) (497,281) (497,281) Franchise Fee 10.00% 12.00% 12.50% 13.00% 13.50%- - - - - Total Projected Franchise Fee(s) 527,771 654,941 688,551 722,925 758,083 Net Shortfall/(Surplus)30,490 157,661 191,270 225,644 260,802 Projected Rate Increase 0.62% 3.21% 3.90% 4.60% 5.32% San Pablo Projected Franchise Fee Increase
City of San Pablo | Review of Republic’s 2023 Rate Applications Page 4 of 4
Chart 1 – 35-Gallon Cart Comparison
Limitations
The level of review conducted for this engagement was limited in accordance with the available project budget, and per our proposal to the Jurisdictions to conduct this review. Of note is that this review was conducted simultaneously for all three Jurisdictions and included a general application of prior practice to all Jurisdictions. Overall, our review focused on ensuring that the Rate Applications were consistent with general past practice, that they were mathematically accurate, and that adjustments were made that were consistent with prior rate reviews. While we conducted a variance analysis and requested that Republic provide an explanation of significant variances, we did not conduct a more detailed review, or make adjustments to Republic’s 2022 and 2023 expense projections, except as otherwise noted above.