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BACKGROUND PGS has an exclusive Franchise with the City to collect, transport and dispose of refuse and recyclable material produced and accumulated within the corporate limits of the City. The Franchise, which started in 1989 and runs through June 2019, grants the City Council the authority to set service rates for refuse and recycling services. When reviewing a PGS rate application, the Council's primary responsibility is to analyze PGS's rate proposal and determine if it is accurate, consistent with the terms of the Franchise and appropriate for the services provided. To assist with that process, the City utilized Crowe Horwath to review PGS's rate application and its report is included as Attachment 2. PGS's current rates went into effect on January 1, 2015. Over the past two years, staff has held discussions with PGS regarding amendments to the Franchise and the status of these discussions are discussed in more detail later in the report. However, critical to these discussions is an agreement to significantly amend the current rate setting methodology in favor of one that is more transparent and consistent with current industry practices. Specifically, the intent is to move from the current profit/rate model based on a Return on Equity (ROE) with true-up provisions to a "cost plus profit" model used in the majority of municipal franchise agreements. The cost plus methodology generally involves a base year rate review that occurs approximately every three years and a more limited annual (interim) review based on an agreed key indicators most commonly related to an CPI index and other significant cost factors. As an outcome of Franchise discussions, PGS and staff have agreed to a "Rate Manual" which incorporates the "cost plus profit" methodology and sets forth the process for future rate adjustments. This rate adjustment request and staff review, is based on the Rate Manual. However, while the Subcommittee has reviewed the Rate Manual, it has not yet been formally adopted by the City Council. Formal, adoption would occur as part of a new Franchise and staff expects that the City Council would make a decision regarding this matter within the next 90 days. Nevertheless, it represents a significant improvement over the current methodology and therefore, its use is beneficial. As a brief summary, the Rate Manual establishes a new process and methodology for determining future rate adjustments that includes a base year review every three years and an interim year review in each of the two years between the base year review. While this process may result in annual rate adjustments, it eliminates the impact of large increases occurring every three to four years, which has been the City's historical practice. The base year rate review is a comprehensive analysis of all of PGS's financial activity and includes submittal of an annual financial audit. The interim year rate review is a more limited process that looks at 1) projected changes in PGS's labor costs, 2) projected changes in PGS's landfill disposal costs, and 3) changes to the Consumer Price Index. While staff and PGS had not reached agreement on the Rate Manual until recently, significant portions of it were used in the past two rate adjustments. Page 2 of 6