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BACKGROUND PGS has an exclusive franchise agreement with the City of Pleasanton to collect, transport and dispose of refuse and recyclable material produced and accumulated within the corporate limits of the City. This franchise agreement runs through 2018. PGS service rates, which recover salaries, rents, maintenance, vehicles, insurance and other operating expenses were last adjusted in July 2004 by 12.28% to reflect "projected" increases in operating expenses through fiscal year ending March 31, 2007. The Franchise grants the City Council the authority to set service rates for refuse and recycling services. 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. PGS submits an annual audit of its expenses to assure that its financial practices are consistent with Franchise terms. PGS has submitted a rate proposal for existing and new recycling services (described later) of approximately 48%. Approximately 32.5% of this amount reflects the estimated cost of providing services through March 31, 2011 and a recovery of costs incurred during the past year which were not factored into the last rate increase in 2004. The remainder is for new recycling services. Status of Service Rates for Existing Services In an effort to better analyze and monitor PGS's expenses for particular services such as recycling, transfer station expansions, general operations, etc., PGS maintains cost centers or "reserves" which have separate accounting to determine the cost of services and the amount of revenue assigned to each reserve. Included as Attachment 2, is a listing of all of the reserves currently monitored by the City and PGS. As indicated in Attachment 2, PGS estimates that it will have an operating deficit of approximately $20 million in March 2011, if a rate increase is not approved. While most reserves reflect a projected deficit, others, such as the Transfer Station Floor Space Expansion Reserve, which covers the cost of expanding the transfer station, is projected to have a positive reserve balance in March 2011. As a result, none of the requested rate increase would be assigned to this reserve. In addition to expense factors, the City evaluates PGS revenue collected from its Pleasanton customers to determine if it is appropriately estimated and recorded. Because PGS provides an annual audit, revenues are accurately recorded. However, staff regularly reviews revenue projections for the three year rate term to determine if they match historical trends. In general, lower revenue projections lead to larger rate increases as a means of closing the gap between revenue estimates and service costs. At this time, staff and the Subcommittee are continuing to review revenue projections, particularly those projections made for new services and accounts. Finally, the PGS rate proposal maintains that the 12.28% increase approved in 2004 was insufficient to meet operating costing over the previous rate period and as a result, it has been required to use other revenue sources to maintain services. Also, because the new requested rate increase was initially scheduled to take place in March 2007, Page 2 of 7