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Crowe Horwath. Mr. Steven Bocian Page 7 December 2, 2014 Depreciation In its application, PGS projected new 2015 capital outlays valued at$252,000. These outlays included: o $32,000 for truck air conditioning $100,000 for mandated wash rack enclosures(to keep storm water out of City sewer system) c $120,000 for additional carts and containers(based on a three year historical average replacement cost). We found these (3)additions reasonable and supported. In the prior rate review,we disallowed a $133,328 amount(largely for commercial bins)from requested depreciation for 2014. PGS has continued to explain to the City that this cost was necessary to assist with the roll out of mandatory commercial recycling program. We added this$133,328 figure back to depreciation (depreciated over the remaining 4.5 years of the franchise term). Impact(s): ;',3 Increase in CY 2015 expense by$30,319. Repairs&Maintenance PGS projected 2015 repair and maintenance expenses by applying the June 2013 to June 2014 change in the BLS Producer Parts Index—Commodities—Machinery &Equipment index (2.99 percent)to the repair and maintenance figure approved for the 2014 base year. Within this cost category, Pleasanton Truck& Equipment(PT&E)provides repair and maintenance services to PGS. PT&E is a related party to PGS, with the same ownership structure as PGS. PT&E charges PGS for repair and maintenance labor on an hourly rate basis. PT&E also charges PGS for parts. PT&E is an authorized Heil distributor, and provides a range of repair and maintenance services to other garbage companies in the area. In our prior rate review, we indicated concerns with the use of this comparable rate methodology used to set the repair and maintenance labor costs paid by City ratepayers, including: _1 There is a material profit component in PT&E related-party charges which we have been unable to precisely determine with the information provided by PGS. This return is in addition to the return on equity provided to PGS in accordance with the franchise agreement os This hourly rate may have no relation to PT&E's actual cost of providing the service to PGS ci There likely is no equivalent market-based rate for the services provided for various reasons (e.g.,the repair and maintenance shop is co-located at the PGS facility) a Other survey data do not support the hourly rate. Even though we did not agree with the approach used to set these PT&E labor charges, absent another definitive approach (or identifiable rate setting method),we attempted to assess the reasonableness of these charges to City ratepayers using the comparable hourly rate method. We provided a limited sample of four hourly rate pricing quotes, with the average rate for four service providers equal to$103.50 per hour.We used a$103.50 per hour rate for CY 2013 to calculate repair and maintenance labor costs. We escalated this rate by the 2.56 percent CPI to project CY 2014 repair and maintenance labor costs. Similar to the RRRS discussion above under hauling/grinding/processing, our preference for this repair and maintenance cost item would be for PT&E to allocate PGS a reasonable portion of its costs to the City for repair and maintenance of PGS's vehicles and equipment.