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HomeMy WebLinkAboutAgenda Report - December 4, 1991 (56)OCIN OF LODI J J • i ' fOd 1 AGENDA TITLE: Review Refuse Rate Methodology MEETING DATE: December 4, 1991 PREPARED BY: City Manager RECOMMENDED ACTION: That the City Council adopt the Refuse Rate Methodology (Exhibit A) jointly prepared by the City of Lodi and Lodi Sanitary City Disposal Co., Inc. to establish criteria for rate review. BACKGROUND INFORMATION: At the Work -Study ("Shirtsleeve") session of November 12, 1991, the City Council heard a presentation on the proposed Refuse Rate Methodology incorporated in the attached document (Exhibit A). The document is now ready for adoption by the City Council. Representatives of Lodi Sanitary City Disposal will be in attendance at Wednesday night's meeting to assist in this presentation and answer any questions Counci lmembers may have. Obviously, this action is not irrevocable so should this methodology prove to be impractical or unworkable for any reason it can always be brought back for re-examination. FUNDING: None required. Respectfully submitted, Thomas A. Peterson City Manager TAP: t r APPROVED 1� THOMAS A, PETERSON .ec c vao« c%rtY nnaW City of Lodi & Lodi Sanitary City Disposal Proposed Rate Methodology Executive Summary INTRODUCTION I EX . , �l A C November 25, 1991 This document describes a methodology for periodically adjusting the rates charged by i.odi Sanitary City Disposal (LSCD) for refuse collection services provided within the City of Lodi. Tis methodology ensures that the manner in which these rates are set is fair and reasonable, and that LSM faces substantial incentives for efficient operation. Rates are based on agreed-upon reasonable forecasts of expenses and revenues. SERVICES COVERED BY THE RATE METHODOLOGY The rate methodology specified herein governs the setting cf rates for the following categories of services rendered by LSCD in accordance with the franchise agreement between IBM and the City of Lodi: Residential refuse, recyclable material, and yard waste collection and processing, Commercial refuse and recyclable material collection and processing, and Industrial refuse collection RATE ADJUSTMENT PROCESS LSCD will file a detailed rate application to cover the costs incurred during the fiscal years ending March 31, 1992, March 31, 1993, and March 31, 1994. This application will be filed on an early 1992 date to be mutually -determined by LSCD and the City, and will propose two equal rate adjustments. The first adjustment will become effective on a mutually -determined date. The rate adjustments will be based on budget projection for the test year periods from April 1, 1991 to March 31, 1992, from April 1, 1992 to March 31, 1993, and from April 1, 1993 to March 31, 1994. ISM will file a detailed rate application on February 15, 1993 for the period from April 1, 1993 to March 31, 1994. Based on this application, the second of the two rate adjustments discussed above will, if necessary, be modified. The detailed rate application submitted on February 15, 1993 will be the start of a two year rate adjustment cycle. For the first year of each cycle, LSCD will file a detailed rate adjustment application by February 15 with rates to become effective OR April 1. For the second year of each cycle, IS® will file, by February 15, a rate adjustment request based on a composite cost index formula with rates to become effective on April L T LOWABIE REVENUES, EXPENSES, and REASONABLE RETURN Allowable Revenues: Allowable revenues corresponding to the above services. ,Allowable Expenses: Allowable expenses corresponding to the above services shall include: ■ Refuse, recycling, and yard waste collection expenses ■ Recyclable and compostable material processing expenses • Transfer station charges ® Disposal charges • Franchise fees Reasonable Return: A reasonable return will be calculated as 12% of collection and processing expenses. Allowable expenses can either be exclusive to the City of Lodi franchise or shared with other jurisdictions. The rate application will identify shared expenses and document the formula used to allocate a portion of shared expenses to the City. LSCD will provide organization and staffing charts to support the payroll expenses of the budget projections. Recyclable and compostable material processing expenses will be allocated to the LSCD franchise based on a percentage of the total material processing facility expenses. The percentage is calculated as the number of tons of recyclable and compostable material from the IS® franchise divided by the total tons from regulated jurisdictions delivered to the material processing facility. The source and tonnage of recyclable and compostable material is tracked and documented using LSCD tonnage reports and the California State Recycling Center/Curbside Certification Number for each jurisdiction. Material is collected and sorted, and then weighed by commodity by jurisdiction. Revenue from the sale of 2 recyclable and compostable material is documented by sale invoice. The City of Lodi franchise will be credited 100%of the actual commodity sales price. PROCEDURE FOR SETTING RATE3 Detailed Rate Application Procedure For the initial period through March 31, 1994, and as well as the first year of each two year cycle, rates will be adjusted following the submission of a detailed rate application. The basis for the rates, revenues, expenses, and return shall be the annual budget for the provision of the above services. The rate adjustment will be determined by the following steps: ■ The application will include a budget for the provision of the above services for the test year. The budget will be adjusted so that only allowable revenues and expense are included. a The Required Test Year Revenue (RTYR) will be calculated by adding the reasonable return to the allowable expenses presented in the budget. The RTYR will be adjusted for any recycling revenue variance in the prior year. a Projected Test Year Revenue (PTYR) will be calculated by estimating the allowable revenues expected to be received at existing rates during the test year. ■ The Additional Required Revenue (ARR)will be the difference between Required Test Year Revenue and Projected Test Year Revenue. ■ The Rate Adjustment Percentage (RAP) will be calculated by dividing the Additional Required Revenue (ARR) by the Projected Test Year Revenue (FTYR). An adjustment will be made to the ARR to reflect any timing lag in rate adjustment in the prior year due to the rate adjustment becoming effective after the start of the test year. Index Year Rate Adjustment Procedure In the second year of each two year cycle, rate adjustments will be determined following the calculation cf a Composite Cost Index (CCI). Rates for the index year will be computed by multiplying the prior year rates by the CCI. The CCI is includes an estimate of the increase in expenses (calculated by multiplying the different allowable expense components of the prior rate application by appropriate estimates of costs 3 increases}, an adjustment for new revenues and expenses due to growth, and an adjustment for any timing delay in the rate adjustment of the prior year. Rate Adjustment The Rate Adjustment Percentage (RAP} resulting from the submission of a detailed rate application or the Composite Cost Index (CCI) calculated during an index year will be applied uniformly to all rates for the services listed in Section 1. LSCD or the City of Lodi may, either as part of the rate application process or separate from that process, propose alternative rate structures. Alternative rate structures Vin not result in a change in required revenue. 4 Lodi Sanitary City Disposal Rate Methodology Detailed Procedure INTRODUCTION W November 25, 1991 The purpose cf this document is to set forth a methodology for periodically adjusting the rates charged by Lodi Sanitary City Disposal (LSCD) for refuse collection services provided within the City cf Lodi. The franchise agreement of September 7, 2988, between LSCD and the City of Lodi (herein referred to as the 'Agreement") governing the collection and 1- - -F - b 1-im of refuse, gives the Chy the discretion to set the rates for these services. This methodology will ensure that the manner in which these rates are set is fair and reasonable. The procedures set forth below ensure that LSCD faces substantial incentives for efficient cperatim. Rates are based on agreed-upon reasonable forecasts of expenses and revenues. Once the City adopts such forecasts, it is the company's responsibility, to the extent that expenses are controllable by the company, to live within those forecasts during the period those rates are in effect. If LSCD does not efficiently manage those expenses which it can control, then its profitability will be adversely affected. I. SERVICES COVERED BY THE RATE METHODOLOGY The rate methodology specified herein governs the setting of rates for the following categories of services rendered by ISM in accordance with the franchise agreement between LSCD and the City of Lodi: Residential refuse, recyclable material, and yard waste collection and processing, Commercial refuse and recyclable material collection and processing, and Industrial refuse collection II. DEFINITIONS Rate Adiustment A1212lication: The package submitted by LSCD to support its request for rate adjustment which will include the following: 1. The most current budget for the provision by IS® of the above services. 2. A series of Exhibits that detail the rate request, including an exhibit which details projected test year revenue and related assumptions. Samples of exhibits are included as Attachment A Test Year: The 12-monthperiod forwhich revenue requirements and rates will be estimated Test years w i I I correspond to the LSCD fiscsl year, which begins on April 1 and extends through March 31 cf the following year. Allowable Revenues: Those revenues that correspond to the above services and are included as revenues for the purpose of determining the appropriate rate adjustment (as described in Section M. Allowable aures: Those expenses that correspond to the above services and are allowed as expenses to be recovered in rates (as described in Section IV). Projected Test Year Revenue: Allowable test year revenues anticipated by LS® at existing rates and adjusted for changes in quantity (e.g., projected number of accounts) for the test year. Projected Test Year Expense: Allowable expenses estimated to be incurred during the test year. Reauired Test Year Revenue: The Ievel of test year revenues that will recover projected test year expenses and a reasonable return. Rate Adjustment Percentage: The percentage by which rates for the test year must be adjusted. The computation of this percentage is described in Section V. III. RATE ADJUSTMENT PROCESS LSM will file a detailed rate application to cover the costs incurred during the fiscal years ending March 31, 1992, March 31, 1993, and March 31, 1994. This application will be filed on an early 1992 date to be mutually determined by LSCD and the City and will propose two equal rate adjustments, the first of which will become effective on a mutually -determined date. The rate adjustments will be based on budget projections for 2 the test y e a periods from April 1, 1991 to March 31, 1992, from April 1, 1992 to March 31, 1993, and from April 1, 1993 to March 31, 1994. LSCD will file a detailed rate application on February 15, 1993, for the period from April 1, 1993 to March 31, 1994. Based on this rate application, the second of the two rate adjustments discussed above Will, if necessary, be modified. The detailed rate application submitted on February 15, 1993 Will be the start of a two year rate adjustment cycle. For the first year of each cycle, LSCD will file a detailed rate adjustment application by February 15, as described below, with rates to become effective on April 1. The detailed rate application and rate adjustment will be based on the test year for the period from April 1 to the following March 31. For the second year of each cycle, LSCD will file, by February 15, a rate adjustment request based on a composite cost index formula, as described below, with rates to become effective on April 1. As specified in the Agreement, LSM has the right to renegotiate the rates at times other than the regular submission of an application in the event of any unforeseen special occurrences, such as a change in landfill location, stricter environmental requirements on equipment, or change in service levels or frequency. In addition, rates W11 be adjusted based on any landfill fee adjustments on the provision of 30 days notification to the City cf Lodi by LSM. IV. 31-T aABT F• REVENUES, EXPENSES, and REASONABLE RETURN Sections A and B below define the categories of revenues and expenses that are allowable. For all of these categories, there is a presumption of reasonableness. LSCD must, at the request of the City, demonstrate that any projected revenue or expense included in the ratemaking calculation is reasonable. A. Allowable Revenues: Allowable revenues corresponding to the services specified in Section I shall include the following revenue categories: 1. Refuse, Recycling, and Yard Waste Collection Revenues 2. Revenues from the sale of recyclable and compostabie material 3. Workers' Compensation Dividends 4. Payments made to LSCD by the City of Lodi to cover the cost of the services described in Section I. B. Allowable Expenses: Allowable expenses corresponding to the services specified in Section I shall include: Refuse, recycling, and yard waste collection expenses 3 Recyclable and compostable material processing expenses Transfer station charges • Disposal charges a Franchise fees Allowable expenses can either be exclusive to the City of Lodi franchise or shared with other jurisdictions. The rate application ,Zl identify shared expenses and document the formula used to allocate a portion of shared expenses to the City. LSCD will provide organization and staffing charts specifying numbers of employees, salaries, and allocation foam 1aswhere appropriate to support the payroll expenses cf the budget projections. B.1 Refuse, Recycling, and Yard Waste Collection Expenses: e Payroll expenses Salaries • Payroll Taxes and Workers' Compensation Insurance • Group Insurance and Pension Plan • Laundry and Uniforms ■ Equipment expenses • Repairs and Maintenance - Parts, Supplies, and Tires Fuel and Oil • Equipment Leases • Licenses and Fuel Use Tic Insurance General ■ Other Expenses Interest • Depreciation o Debt Service • Telephone o Utilities • Computer Expenses • Equipment Rental • Office Supplies and Expenses • Facility Rental • Property Taxes Permits and Licenses • Officers' Life Insurance o Accounting Legal • Consulting • Education and Training Public Awareness 4 W • Subcontract Hauling • Administrative Expenses • Shop Expenses • Miscellaneous (e.g., auto expense, repairs & ,maintenance- general, dues and subscriptions, freight, radio expense, 4M3.;plan administration) r Government imposed expenses due to regulatory or legal mandate Depreciation expenses (not already included in the debt service, lease, or rental expense categories) -v01 follow the straight line method. The depreciation life will be the lesser of the life permitted by the Internal Revenue Service, the financing terms for the particular asset, or the expected economic life for the level of use. Interest expenses will be subject to an interest rate "cap" of the prime rate plus 2.75% multiplied by the projected capital amounts to be financed. B.2 Recyclable and Compostable Material ProcessingE= en nses: These expenses shall be calculated according to the following formula: R = A x (13/C) where: R is the portion of the allowable projected recyclable and compostable material processing expenses assigned to the LSCD franchise. A is the total projected CWRS recyclable and compostable material processing facility expenses that fall into the categories specified above in paragraph B.I. B- is the number of recyclable and compostable material tons from the Chi of Lodi franchise projected to be delivered in the test year by UCD to the CWRS material processing facility. _C is the total number of tons projected to be received in the test year from all regulated jurisdictions by the CWRS material processing facility. LSM will provide documentation cf recyclable and compostable mate -;al tons delivered to the CWRS material processing facility from all regulated jurisdictions for the most recent obtainable 12 month period preceding the test year of the rate application. B.3 Transfer Station Charm: Charges assessed by the CWRS transfer station to process, transport, and dispose of refuse. B.4 Disposal Charees: Tipping fee charges assessed by a Iandfil! for refuse disposal. BS Franchise Fees: Franchise fees as specified by the City of Lodi. B.6 Community Programs: Community contributions promoting recycling as specified by the City of Lodi. C. Reasonable Aehm1: The allowed reasonable return is 12% of the allowed reasonable expenses included in paragraphs B.1 and B2. In order to ensure that LSCD has the opportunity to earn a reasonable return while, at the same time, providing incentives for efficient operation, LSCD shall be allowed a return that is based on the forecasted expenses judged by the City to be reasonable. If actual test year expenses or revenues differ from these forecasts, then earned return will lilakse differ fnan the allowed return. Thus, if LSCD spends more than is forecast, its return -vd]l be less than authorized. V. PROCEDURE FOR SETTING RATES V.1 Detailed Rate Application Procedure For the initial period through March 31, 1994, as well as the first year of each two year cycle, rates will be adjusted following the submission of a detailed rate application. The basis for the rates, revenues, expenses, and return shall be the annual budget for the provision of the services specified in Section I. The rate adjustment will be determined by the following steps: The application will include a budget for the provision of the above services for the test year. The budget will be adjusted so that only allowable revenues and expenses, as described in Section IV, are included. ■ The Required Test Year Revenue i R I'YR) will be calculated by adding the reasonable return to the allowable expenses presented in the budget. The Recycling Revenue Adjustment (RRA) will be calculated as follows: RRA = REVACT - REVEST. where: C ell% REVACT is the actual revenue realized by LSCD from the sale of recyclables from the City cf Lodi franchise during the prior fiscal year, and REVEST is the estimate of LSCD recycling ievenue from the City of Lodi franchise included in the prior test year's rate calculation. [Note that in 1991, RRA is zem.) The source and tonnage of recyclable and compostable material is tracked and documented using LSCD tonnage reports and the California State Recycling Center/Curbside Certification Number for each jurisdiction. Material is collected and sorted, and then weighed by commodity by jurisdiction. Revenue from the sale of recyclable and compostable material is documented by sale invoice. The City of Lodi franchise will be credited 1001/o of the actual commodity sales price. ■ Projected Test Year Revenue (PT)(R) Will be calculated by estimating the allowable revenues expected to be received at existing rates during the test year. The Additional Required Revenue (ARR) is computed as follows: The Rate Adjustment Percentage (RAP) will be calculated by dividing the Additional Required Revenue (ARR) by the Projected Test Year Revenue (PTYR). An adjustment will be made to the ARR to reflect any tktr rg lag in rate adjustment in the prior year due to the rate adjustment becoming effective after the start of the test year. The adjustment is based on the number cf months delay during the prior fiscal year. The Kate Adjustment Percentage (RAP) is calculated as follows: RAP = ARR t PREVARR x M/12 x (I +r) where: PTYR PREVARR is the previous year's additional required revenue M is the rnmber of months between the start of the previous test year and the effective date of the previous year's rate change r is the most current interest rate on 1 -year Treasury Bills 7 W2 Index Year Rate Adjustment Procedure In the second year of each two year cycle, rate adjustments will be determined following the calculation of a Composite Cost Index (CCI). Rates for the index year will be computed by multiplying the prior year rates by the M. The CCI includes an adjustment for new revenues and expenses due to growth, adjustment for the increased cost of serving all customers, and adjustment for delay in implementing prior year rates. The CO is calculated as follows: CCI = 1- 025*uu9o' + [A*vv% + B*ww% + C*xx% + D*yy% + E*zz%] + (Prior Year Delay) where, uu% = Projected percentage change in customer accounts (Note: uu% is multiplied by 25% to reflect the fact that only 25% of costs remain fixed as new customers are served), A = Prior Year Detailed Rate Application Payroll & Payroll Burden Expenses as a percent of total expenses, vv% = Percentage change in the Employment Cost Index - Civilian Workers/Service-producing for the most recent 12 month period where information is available, B = Prior Year Detailed Rate Application Equipment Expenses (except Equipment Leases) as a percent cf total expenses, ww% = Percentage change in the US CPI -U for Gasoline for the most recent 12 month period where information is available, C = Prior Year Detailed Rate Application Depreciation, Interest, Equipment Leases, and Debt Service as a percent of total expenses, roc% = Anticipated percent change in annual expense due to new capital additions through purchase or lease, D = Prior Year Detailed Rate Application Transfer Station and Disposal Charges as a percent of total expenses, 8 yy% __ Anticipated percentage change in annual transfer station and disposal fees, E = Prior Year Detailed Rate Application All Other Expenses as a percent of total expenses, n% = Percentage change in the US CPI -U for All Items during the prior fiscal year for the most recent 12 month period where information is available, and Prior Year Delay = RAP x M/12 x (1+ r) where: RAP is the previous yea's rate adjustment percentage M is the number of months between the start of the previous test year and the effective date c£ the previous year's rate change r is the most current interest rate on 1 -year Treasury Bills V3 Rate Adjustment The Rate Adjustment Percentage (RAP) resulting from the submission cf a detailed rate applicaticn or the Composite Cost Index (Cts) calculated during an index year X71 be applied unifmdy to all rates for the services listed in Section I. ISM or the City of Lodi may, either as part cf the rate application process or separate from that process, propose alternative rate structures. Alternative rate structures are subject to the City's review. Any such proposed change will have no effect on the amount of projected revenues. 9 Exhibit I "Numbers are Fictitious" LODI SANITARY CITY DISPOSAL REVENUE REQUIREMENT ESTIMATES FOR TEST YEAR ENDING XX—XX—XXXX ATTACHMENT A EXPENSE ITEM RMn Payroll Payroll taxes Workers' Comp Group Insurance Piensicn Plan Equipment Repairs & Maintenance Fuel & Oil Equipment le-ises Licenses & Fuel Use Tax insurance, General Other Expenses Interest Depreciation Debt Service Telephone Utilities Computer Expenses Equipment Rental Officu Supplies and Expenses Facility Rental Pncperty Taxes Permits and Licenses Officers' Life Insurance Accounting Legal Consulting Education and Training Public Awareness Subcontract Hauling Administration Expenses Shop Expenses Miscellaneous Govt Irgcosed Regulatory Expense Subtotal Collection Expenses Allocated Material Processing (Exhibit 2) Operating Margin Transfer Station Charges Disposal Charges Franchise Fecs (8% of RTYR) Total Required Test Year Revenue (RTYR) I11 15,500 5,580 $1,000 I,000 $58,783 Exhibit 2 L,ODI SANITARY CITY DISPOSAL "Numbers are Fictitious" MATERIAL PROCESSING EXPENSE ALLOCATION FOR TEST YEAR ENDING XX-XX-XXXX EXPENSE ITEM Payroll Payroll taxes $1,000 Workers' Comp 1,000 Group Insurance 1,000 Pension Plan 1,000 Equipment Repairs & Maintenance 1,000 Fuel & Oil 1,000 Equipment leases 1,000 Licenses & Fuel Lbe Tax 1,000 Insurance, General 1,000 Other. Expenses Interest 1,000 Depreciation 1,000 Debt Service 1,000 Telephone 1,000 Utilities 1,000 Computer Expenses 1,000 Equipment Ferta1 1,000 Office Supplies and Expenses 1,000 Facility Rental 1,000 Pity Taxes 1,000 Permits and Licenses 1,000 Officers' Life Insurance 1,000 Accounting 1,000 Legal 1,000 Consulting 1,000 Education and Trirrirg 1,000 Public Awareness 1,000 Subcontract Hauling 1,000 Administration Expenses 1,000 Shop Expenses 1,000 Miscellaneous 1,000 Govt iuQosed Regulatory Expense 1,000 Total Expenses $31,000 LSCD Allocation Factor (Exhibit 3) 50.0% Material Processing Expenses $15,500 Allocated To L.SCD Exhibit 3 "Numbers are Fictitious" w L.ODI SANITARY CITY DISPOSAL MATERIAL PROCESSING EXPENSES ALLOCATION FACTOR CALCULATION FOR TEST YEAR ENDING XX -XX -)O= CWRS MATERIAL PROCESSING FACILITY PROJECTED =ESI' YEAR VOLUMES Total Tons Pmject ed Delivered To CWRS Material Processing Facility Total Tons Projected Received Fran LSCD Franchise % of Material Processing Facility Volume Represented By LSCD (Used in Exhibit 2) ,11 100 50.0% Exhibit 4 -Numbers are Fictitious" LODI SANITARY CITY DISPOSAL ALLOWABLE REVENUES PROJECTIONS FOR TEST YEAR ENDING XX -XX -,'V= ALLOWABLE REVENUES LSCD Refuse, Recycling, and Yard waste Collection (1) Sale of Recyclable & Compostable Materials (2) Wadeers` Compensation Dividends Payments to LSCD from City cf Lodi Total Projected M& Year Revenues (PTYR) Notes (1) & (2) Exhibit 4 will include two schedules detailing collection and recyclable material revenue projections lot, $56,000 Exhibit 5 "Numbers are Fictitious" RECYCLING REVENUE w LODI SANITARY CITY DISPOSAL RECYCLING REVENUE ADJUSTMENT FOR TEST YEAR ENDING XX -XX -)D= Estimate of LSCD Recycling Revenue Used in $3,000 Prior Test Year Rate Calculation (REVEST) Actual LSCD Revenue Fran the Sale of $4,000 Recyclable Material in Prior Fiscal Year (REVACT) Recycling Revenue Adjustment (RRA) b $1,000 Current %st Year Required Revenue (seeExhibit 7) (REVACT - REVEST) Exhibit 6 LODI SANITARY CITY DISPOSAL "Numbers are Flctitious" PRICR YEAR TEMO NG ADJUSTMENT FOR TEST YEAR ENDING XX -XX -)C= Exhibit 7 "Tkmbers are Fictitious" LODI SANITARY CITY DISPOSAL ADDITIONAL REQUIRED REVENUE CALCULATION FOR TEST YEAR ENDING XX-XX-XOM ADDITIONAL REQUIRED REVENUE Total Required Test Ywr Revenue (RTYR) Im: 71-c1 Projected Test Year Revenue (PTYR) ..L4ew*. Recycling Revenue Adjustment (RRA) Additional FegTized Revenue (ARR) $58,783 (Exhibit 1) $56,000 (Exhibit 4) $1,000 (Exhibit 5) $1,783 � rte`• q Exhibit 8 LODI SANITARY CITY DISPOSAL "Numbers are Fictitious" RATE ADJUSTMENT CALCULATION FOR TEST YEAR ENDING XX-XX-XXXX REQUIRED REVENUE Additional Required Revenue (ARR) Add: Prior Year Timing Adjustment Total Additional Required Revenue Rate Adjustment Percentage = Total Additional Required Revenue PTYR (Exhibit 4) $1,783 (Exhibit 7) $1,575 (Exhibit 6) $3,358 6.0%