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HomeMy WebLinkAboutCity Council Resolution 95-12 RESOLUTION 95-12 RESOLUTION OF THE CITY COUNCIL OF THE CITY OF SARATOGA MAKING FINDINGS REGARDING THE RATE BASE FOR GREEN VALLEY DISPOSAL COMPANY FOR 1994-1996 AND ESTABLISHING BASE RATES FOR RUBBISH DISPOSAL IN THE CITY OF SARATOGA WHEREAS, the City has conducted an extensive and thorough performance audit and rate adjustment proceeding regarding Green Valley Disposal Company, Inc.'s refuse, recycling, and yard waste collection services pursuant to its agreements with the City; and WHEREAS, the attached findings and decision reflect the analysis and conclusions of the City Council and are consistent with Resolution 95-01 adopted by the Council on January 4, 1995; and WHEREAS, Resolution 95-01, including all attachments thereto, and all staff reports, analyses, performance audit, and other documents previously submitted to the City Council in connection with these rate adjustment proceedings are incorporated, by this reference as set forth in full, heroin. NOW, THEREFORE, THE CITY COUNCIL OF THE CITY OF SARATOGA DOES HEREBY RE8OLVE AS FOLLOWS: 1. The Findings and Decisions attached hereto as Exhibit A are approved and adopted. This decision constitutes a final administrative decision pursuant to Code of Civil Procedure section 1094.6 as adopted by section 2-05,030(h) of the Code of the City of Saratoga. Any application for judicial relief from this decision must be sought within the time limits and pursuant to the procedures established by Code of Civil Procedure section 1094.6, or such shorter time as required by state or federal law. PASSED AND ADOPTED at a regular meeting of the City Council of the City of Saratoga, California, held on the 15th day of March, 1995 by the following vote. AYES: Councilmembers Jacobs, Moran, Tucker, Wolfe and Mayor Burger NOES: None ABSENT: None ATTEST: Deputy City cierk/ ' FINDINGS AND DECISION IN 1994-1995 RATE PROCEEDING REGARDING A RATE ADJUSTMENT AND ESTABLISHMENT OF A REVISED RATE SCHEDULE FOR REFUSE, I~ECYCLING, AND YARDWASTE COLLECTION SERVICES OF GREEN V~TxRY DISPOSAL COMPANY, INC. IN THE CITY OF SARATOGA I. RATE-SETTING PROCESS. A. This rate-setting proceeding is conducted pursuant to the authority of the City under State' law, City Code § 7-05.120, and its franchise agreement with Green Valley Disposal Company, Inc. Pursuant to public utility law and the Franchise Agreement, Green Valley Disposal Company [Green Valley] bears the burden of proof in demonstrating the need and extent of any rate adjustment. B. The City Council held hearings on the refuse, recycling, yard waste, and rate structure systems on January 4, 1995 and February 15, 1995. C. The City received public comments, both oral and written, during the public hearings, and the Council has considered those comments and concerns. The City has also provided Green Valley with approximately 12 months to respond to the concerns expressed by the performance audit performed in conjunction with this rate- setting, and almost 12 months to respond to concerns expressed by the Rate Review Committee concerning financial information and rate schedules. D. During the current rate-making proceeding, Green Valley has not presented the City or the Council with a rate adjustment application or an adequate Schedule of Rates. Instead, the City in cooperation with the other 3 West Valley jurisdictions has spent hundreds of hours of staff and consultant time attempting to determine what rates should be established for the provision of refuse collection services, E. The Rate Review Committee, City staff, and the City Council disagree with Green Valley over whether the information provided by Green Valley has been complete or adequate to resolve the significant issues presented, received only after repeated requests by staff, and given the ratepayers an appropriate oppor- tunity to comment or examine the performance of Green Valley or its assertions of profit entitlement.. F. Green Valley's audited financial statements as of June 1994 were not made available to the City until December 1994, and then only when requested directly from the Company's offices. II. FRANCHISE HISTORY. A. In 1983, the City of Saratoga entered into a Franchise Agreement for a 20-year period that granted Green Valley the exclusive right to provide refuse collection services in the City in exchange for the right of the Council to set rates and generally regulate service and for payment of a 10% franchise fee on Green Valley's gross revenues resulting from its refuse collection services in the City as defined in the Franchise Agreement. At the same time that the Franchise Agreement was approved, the City approved refuse collection rates for Green Valley's services. 1 B. The rate base approved for 1993-1994 and 1994-1995 consists of labor, operating costs, depreciation and interest, administrative costs, disposal fees, and franchise fees as presented in the performance audit and as may be more fully described in these findings. C. Disposal fees plus surcharges for 1993-1994 were as follows: $43.55 per ton effective July 1, 1993; $42.36 per ton effective October 1, 1993; and $42.95 per ton effective January 1, 1994. Disposal base rates for 1994-1995 are set at $26.60 per ton and disposal surcharges are set at $16.36 per ton. IV. CONSULTANT FEES. A. Green Valley paid Barakat & Chamberlin, Inc. [BCI] approximately $141,000 to assist it in responding to the performance audit and the current rate-setting process. In justifying its payments to BCI, Green Valley conceded that it does not have the in-houseexpertise to adequately participate in a rate adjustment proceeding without consultants. Green Valley has the obligation under Section 5(D) of the Franchise Agreement to prepare its rate applications and rate proceedings at its own cost. However, Green Valley has not presented any budget for the future retention of such expertise, whether in-house or by contract. In addition, there is no apparent reason that better organization and training within Green Valley would not obviate the need for such consultant assistance. B. BCI made one presentation to the City Council on January 4, 1995. Its testimony focused on the profit entitlement of Green Valley and payment of its own fees as an operating expense, and none of BCI's work appears to have addressed any issues of efficiency, restructuring of accounting or customer service practices, ratepayer needs or desires, improved container services, ratemaking alternatives, or other central issues in this ratemaking proceeding. BCI conducted no community outreach efforts and did not participate in any community forums on refuse collection or recycling. BCI did no analysis of the benefits of various profit- basis alternatives or projections of the effect of reductions in the numbers of cans picked-up. Following the January 4 meeting, BCI did not make any presentation to the Council or the public. It is therefore inappropriate for the ,[atepayers to bear the costs of this consultant work. C. In addition, the one-time waiver in this rate-making proceeding of the requirement that Green Valley complete and file a comprehensive application for a rate adjustment means that Green Valley has avoided the non-recoverable expense of preparing and processing such an application. Instead, the ratepayers and the general funds of the West Valley jurisdictions, and of the City in particular, have had to bear the brunt of this proceeding. V. LEVEL OF PROFIT. A. Green Valley contends that it is entitled to a 5% after- tax profit each and every year of the franchise. Such an interpretation is inconsistent with the terms of the Franchise Agreement, the best interests of the ratepayers, and the history of the franchise since 1983. B. Green Valley made such large surplus profits in the mid- 1980's from its franchise in the City of Saratoga that it voluntarily allowed some of those surplus profits to be devoted to holding the rates of service down for a short period of time. However, none of that surplus profit was assigned investment return and the excess profits in 1984 were never credited to ratepayers. In addition, it appears that Green Valley has averaged approximately 5% after-tax profit over the entire term of the franchise. Given the fact that Green Valley has suffered some shor~falls in profit during 1992-1993, it is fair that Green Valley be granted some additional rate relief to pay for this estimated shortfall in past profit. On the other hand, Green Valley has not provided the City with any evidence that these shortfalls were necessarily incurred or that Green Valley made any efforts to reduce the alleged shortfalls. C. The 5% after-tax profit guideline is not contained in the Franchise Agreement language outlining the Council's review of the rate adjustment application. However, the Council believes that 5% is a useful guideline in evaluating the estimated profits that Green Valley should be allowed to take out of the Saratoga service. D. Green Valley's refuse collection service in Saratoga continues to involve almost no risk and almost no capital invest- ment. There is no indication that any risk has increased since 1983, and in fact, the risk may actually have been significantly reduced as the community has proven to be built-out and stable. There is no indication of any billing or collection problems and no exposure of employees to any particular risks in making collections. E. The Council finds that 5% is a guideline as explicitly stated in the Franchise Agreement and not an entitlement or guarantee. The Council believes that the 5% after-tax profit can and should be varied to apply sanctions for poor or inadequate performance or service or reward for exceptional service or risk. While the on-street performance of Green Valley has been deter- mined by the auditor to be acceptable, the provision of financial information, rate justification, and public information on pro- posed rates has fallen short of a reasonable standard. Therefore, it would be appropriate under the franchise for the City to apply a less-than-5% profit for the coming rate cycle. However, because ofthe volatility and uncertainty of refuse collection during the coming 12 to 36 months as recycling and yard waste collection further develop in the City, the Council is willing to allow the 5% after-tax profit on designated expenses. VI. EXPENSES ON WHICH PROFIT 18 TO BE BASED. A. [RANCHIS~ lEES. Green Valley has requested the City to continue to authorize Green Valley to take a profit on the franchise fees imposed by the City under the Franchise Agreement. Such a profit calculation does not appropriate because the Franchise Agreement calls for the franchise fees to be charged on 5 gross revenues, apparently including Green Valley profit. However, profit has been allowed on franchise fees since 1983, and there is no evidence that any aspect of the franchise fee or its basis has significantly change since 1983. Therefore, the City will allow the City franchise fees to be included in the calculation of the operating ratio and allowable profit for Green Valley. B. DISPOSAL BASERATES. Green Valley has requested the City to continue to authorize Green Valley to take a profit on the disposal base rates charged to Green Valley. Refuse is usually disposed at the Guadalupe Landfill, which is wholly owned and operated by the Guadalupe Rubbish Disposal Company. The allowance of profit on these base rates is a difficult question. Green Valley bears little risk with regard to these base rates, because the City has separately contracted with Guadalupe to allow Green Valley to.dispose of as much refuse and trash as Green Valley delivers from the City. Green Valley expressly disclaims any contractual relationship with or ability to influence any operation or chargeof Guadalupe. In addition, Green Valley has no incentive to seek alternative disposal sites because of the City contract with Guadalupe and actually earns windfall profit when Guadalupe increases its charges. However, the Franchise Agreement requires Green Valley to dispose of rubbish and trash whether or not the City has designated a disposal site. As with franchise fees, the City has allowed profit on disposal base rates since the inception of the franchise in 1983, and disposal base rates have not increased dramatically since that time. Therefore, the City will allow the disposal base rates to be included in the calculation of the operating ratio and allowable profit for Green Valley. C. DISPOSAL SURCHARGES. Green Valley has requested the City to resume authorization of Green Valley taking a profit on the disposal surcharges passed through Green Valley. At the time that the Franchise Agreement was signed, there were no surcharges on disposal base rates. The first surcharge on solid waste disposal was imposed in 1987-1988, and the total of all such surcharges remained de mlni~is at less than $1 per ton until 1990-1991. The surcharges on the disposal of refuse then soared dramatically beginning at $5.08 per ton, to $15.99 per ton in 1992- 1993, and reached $16.36 per ton in 1994-1995. The principal contributor to that increase has been the imposition of a disposal tax by the City of San Jose. Any profit on these surcharges has not been earned in any way by Green Valley, poses no risk of any kind to Green Valley operations, and would be a fortuitous windfall. Disposal surcharges, like disposal base rates, are charged to the City by Guadalupe as part of the 1983 agreement to which Green Valley was not a party. Guadalupe Rubbish Disposal Company voluntarily incurred these fees and surcharges by initiating annexation to the City of San Jose. Neither that annexation nor the surcharges benefit the customers of Green Valley in the City of Saratoga. Beginning in 1990, the West 'Valley jurisdictions began disallowance of profit on disposal surcharges. Green Valley has not provided any persuasive argument or reason why that disallow- 6 ance should not continue. Therefore, no profit on disposal sur- charges will be allowed to Green Valley, but Green Valley will be allowed to recover its actual expenses for such surcharges. VII. TAX PATE FOR CALCUlaTION OF AFTER-TAX PROFIT. A. Green Valley has an obligation to the ratepayers to seek and use the most cost effective tax basis available. The City has neither dictated nor approved any particular tax status during the franchise history. B. Green Valley is unable to divulge what its actual income tax rates or payments have been or are estimated to be. Instead, it has previously urged usage of a top bracket rate of between 45 and 49 percent. This is based on Green Valley's current status as an S-Corp, which means that the 4 individual shareholders are taxed, rather than the corporation. Green Valley is not entitled to attribute more than its actual tax expense in calculating an estimated after-tax profit. The Consultant who performed the performance audit recommended that a tax rate of 35% be used. C. Green Valley and City staff after extensive discussion have now jointly agreed to recommend a 40.1% tax estimate which would account for a standard Federal and State C-Corp income tax bracket. This approach is consistent with the normal practice of the California Public Utilities Commission with regard to privately held corporations, so that highly individualized income tax brackets, affluence and poor tax planning, do not control the rates charged and penalize ratepayers. Therefore, the tax estimate for this rate setting to be used in calculating the after-tax profit shall be 40.1%. VIII. OPEPATING PATIO. A. The ultimate result of the decisions made in this rate- setting is that an operating ratio of approximately 93.3% on all expenses will be established for 1993-1994, 1994-1995, and 1995- 1996. B. These operating ratios are consistent with the operating ratios throughout the Bay Area, and Green Valley has not demonstrated any demand from investors, banks, or potential purchasers for any different operating ratio. C. These operating ratios will provide Green Valley with a fair and reasonable return on expenses. IX. PATES ARE JUST AND REASONABLE TO THE PATEPAYER8. A. The rates established in Attachments 3, 4 and 5 to the February 15, 1995 report from the City Manager to the City Council are just and reasonable to the ratepayers in the City of Saratoga. X. MISCELLANEOUS. A. Nothing contained in this decision shall be construed in any way as binding or applying to any rate-making decision or interpretation by the Cities of Monte Sereno, Campbell or the Town 7 of Los Gatos; and this rate-making decision is made in the best interests of the refuse, recycling, and yard waste collection services for the citizens of the City of Saratoga alone. B. Green Valley has elected to place similar issues of profits on franchise fees and disposal costs, and other related issues before the U.S. District Court for the Northern District of California in a lawsuit against the City of Monte Sereno. The City has acted fairly in light of Green Valley's assertions and representations; should the Federal or State Courts in the Monte Sereno litigation determine that the allegations of Green Valley regarding entitlement to profits and balance accounts are in- correct or untrue, the City reserves the right to review those allowances as excess and unearned revenue for purposes of future rate-making. C. Green Valley has asserted that prior rate decisions, statements by Rate Review Committee members, or other occurrences have created ambiguities in the Franchise Agreement that have devalued the Council's authority to set rates and the ratepayers' right to a just and reasonable system. The Council does not agree with Green Valley's position, and one of the purposes of this written decision is to minimize Green Valley's opportunity to hypothecate ambiguities in the future. D. Under the State Government Code and the Code of the City of Saratoga, any amendment to the Franchise Agreement or any agreement between the City and Green Valley requires the authori- zation of the Council. E. The rates established by the City and the approved budgets for Green Valley in this rate-making process are integrated decisions, and should any part of this rate-making be determined to be invalid or illegal, the entire decision must be reconsidered and the rates and budget reevaluated in light of the invalidity or illegality, and no part of this rate-making process or budget shall be severable. mnrsH\2TS\Res\Rutiates .msr 8