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,.. Crowe Fiorwath. Mr. Brian Dolan Page 2 October 27, 2015 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. 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 City has developed a draft Rate Manual which describes the process and approach for rate setting. Features of this new methodology, which is currently in draft form and at the City's direction was used as a basis for this interim year rate review, are as follows: Allow interim year adjustments in the two (2)years between base years Conduct base year(detailed) rate reviews every three(3)years(the previous base year was 2015) Use the operating ratio(OR) methodology to determine profit(with an OR ranging from 89 to 91 and a target of 90 percent)' Define allowable, non-allowable, and pass through expenses Disclose and provide sufficient supporting documentation for related party transactions Eliminate the revenue"true up" mechanism(balancing account) from prior methodology El Eliminate the CART revenue share Eliminate ROE and corporate tax equivalent profit mechanism.2 Interim year rate reviews follow a streamlined process. Interim years occur during each of the two years between base years, and are triggered if the hauler submits an Interim Year Rate Change Application. In interim years, changes in labor costs are adjusted based on a labor index while changes in landfill disposal costs are adjusted based on the projected change in landfill disposal costs.All other costs are adjusted based on the percentage change in the San Francisco-Oakland-San Jose Consumer Price Index(CPI), All Items,for All Urban Consumers. The CPI is published by the U.S. Department of Labor, Bureau of Labor Statistics. City-approved rate changes granted to PGS since 2004 include: July 2004— 12.28 percent rate increase(residential and commercial) `i June 2008— 12 percent rate increase(residential and commercial) 2009-2010— 15.58 to 23.29 percent rate increase (residential), 30.68 percent rate increase (commercial) 7 2011 —1.95 percent rate increase(commercial only) 2013—5 percent rate increase (residential and commercial) n 2014—7.8 percent rate increase(residential and commercial) 2015—3.26 percent rate increase(residential: 2.5%for 32-g, 5.88%for 96-g; 3.26%commercial). 1 A profit is allowed,based on a targeted operating ratio ranging between 88 and 92 percent. In the base year,if residential rates remain unchanged at an OR within the range of 88 to 92 percent,and the franchise hauler actually realized an OR within this range,then that same OR resulting in no rate change is used,and no rate change occurs. Otherwise,a 90 percent OR is used for the base year calculation. 2 This new rate setting methodology is still in draft form and has not yet been formally incorporated by reference into the franchise agreement. Draft—For Discussion Purposes