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Crowe Horwath. Mr. Steven Bocian Page 2 December 2, 2014 PGS has an exclusive franchise to collect, transport, and dispose of refuse and recyclable material produced and accumulated in the City. PGS provides residential and commercial collection services, including refuse, recycling, and green waste (with food scraps)collection. PGS also operates the Bush Transfer Station which includes a material recovery facility. Section 18 of the Refuse Collection Agreement, titled "Collection Rates and Billing,"specifies how rates are set. Key provisions of Section 18 are that: • The City Council shall fix and determine rates is PGS receive a fair return on investment o PGS prepares an annual audited financial statement • Capital expenditures above$10,000 require City Manager review and approval o Certain expenses are considered non-allowable • PGS is allowed a return on equity(ROE) ranging from 8 percent to 16 percent. Exhibit A of the agreement describes how the ROE is determined • PGS is allowed to retain 50 percent of gross revenues from sale of recyclable materials o Salaries of PGS principals are capped at 4.1 percent of annual revenues • Rate increases should take into consideration previous cost and rate experience o Allowable expense categories are identified (in Exhibit B to the franchise agreement; see the 19 categories of expenses identified in Table 2 below) O The City has the ability to amend allowable expenses (Exhibit B)in order to"reflect future changes necessary to provide PGS with a fair rate of return and to protect the public from unnecessary rate increase" n PGS must divert 9.52 percent of PGS's revenues to the recycling program; segregate recyclable expenses and revenues from refuse collection costs; provide an annual audited financial statement; and establish a recycling program rate reserve.' Table 2 City of Pleasanton Refuse Collection Agreement Allowable Expense Categories (Per Exhibit B) 1. Salary and Wages 8. Data Processing 15. Transfer Station Expansion Costs 2. Dumping/Hauling 9. Postage/Office Expense 16. Landfill Closure Costs 3. Insurance 10. Fuel/Oil 17. Return on Equity 4. Depreciation 11. Legal/Accounting 18. Corporation Tax Equivalent 5. Repairs/Maintenance 12. Franchise Fees 19. Other Expenses 6. Interest Expense 13. Taxes/Licenses 7. Employee Benefits 14. Land Use The City has recently been in discussions with PGS to adjust its rate setting process and methodology in conjunction with consideration of a new updated franchise agreement. The key features of this new methodology, which is currently in draft form, are as follows: 'Credit reserves(excess revenues)are used to defray future rate increases, cover future costs,or mitigate future reserve deficiencies. Deficit reserves are recoverable from future rate increases or credit reserves.