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a Crowe Horwath. Mr. Steven Bocian Page 11 December 2, 2014 The franchise agreement between the City and PGS states that the annual rate of return on equity shall not be less than 8 percent or more than 16 percent of the equity base. The calculation for CY 2013 and CY 2014 is set at 8 percent of the equity base. In its Application, PGS included a calculation for profit based on the operating ratio methodology. PGS set the profit level equal to an operating ratio of 90 percent. This had the effect of increasing PGS's profit from 2014 to 2015 by $578,264(an over 40 percent increase in profit). We are disallowing this profit increase based on the fact that the OR method was intended to be used in conjunction with other agreed upon rate setting elements specified in the City's draft rate setting methodology, including full inclusion of the CART recycling revenues in the ratebase, and treatment of related party transactions such that they are allocated to the City using an agreed upon method.We did allow a CPI escalation on the ROE profit level from 2014, consistent with the treatment of all other expenses presented in the Application. Impact(s): Reduction in CY 2015 expense by$535,760. 5. Recommended Rate Change Accounting for the aforementioned adjustments, Crowe recommends a 3.26 percent increase as shown in Attachment B. 6. Comparative Rate Survey Crowe compared PGS rates to the rates charged by similar nearby jurisdictions. The analysis reveals that Pleasanton ratepayers pay, in general, above market rates (see Attachment A). In the residential sector, City ratepayers subscribing to a 32-gallon cart pay a 13.78 percent higher rate than the regional average. However, ratepayers subscribing to a 96-gallon cart pay a rate significantly lower than the regional average, by a margin of 46.64 percent. In the commercial sector, City ratepayers pay rates between 20 and 27 percent higher than the regional average. In the industrial (debris box) sector, City ratepayers pay rates somewhat higher than the regional average, by a margin of 5.47 percent. r » * • We appreciate the contribution of City management and your input and direction on this rate setting project. We also thank PGS management for its timely responses to our data requests. If you have any questions regarding this report, please call Erik Nylund at (415) 230-4963 in San Francisco. Very truly yours, Crowe Horwath LLP