Item 12 Staff Report Adopt Resolution Making Findings Regarding the Rate Base for Green Valley Disposal Company for 1994-1996 and Establishing Base Rates for Refuse Collection in the TownDATE:
TO:
FROM:
SUBJECT:
COUNCIL AGENDA
DATE: 2/6/95
ITEM NO.
TOWN OF LOS GATOS
COUNCIL AGENDA REPORT
February 3, 1995
MAYOR AND TOWN COUNCIL
/
LARRY E. ANDERSON, TOWN ATTORNEY
ADOPT RESOLUTION MAKING FINDINGS REGARDING THE RATE BASE FOR GREEN
VALLEY DISPOSAL COMPANY FOR 1991 1996 AND ESTABLISHING BASE RATES FOR
REFUSE COLLECTION IN THE TOWN
RECOMMENDATION:
Adopt the attached resolution which incorporates the Council's findings and decision at ite meeting
of January 17, 1995.
DISCUSSION:
On January 3 and 17, 1995, after extensive public comments and hearings, the Council approved
a rate base and rates for refuse, recycling, and yard waste collection services by Green Valley Disposal
Company, Inc.
PREPARED BY: LARRY E. ANDERSON, Town Attorney
LEA:yfg
C:\WPFILES\CNCLRPTS\GREENVLL.TCR
ATTACHMENT$:
Attachment 1 - Resolution
Exhibit A to Resolution
Attachments to Exhibit A:
Attachment 2 - Letters
Revised: 2/3/95 3:14 pm
Findings and Decisions
1. Approved Budget for Green Valley FY 1993-1994
2. Approved Budget for Green Valley FY 1994-1995
3. Balancing Account 3-Year Amortization Schedule
4. Proposed Solid Waste Rates as of February 1, 1995
DISTRIBUTION:
Jean Cushman, 16123 Loretta Lane, Los Gatos, CA 95032
Dan Williams, 304 Harding, Los Gatos, CA 95032
Margaret Woosley, 18 Fillmer, Los Gatos, CA 95032
Gene Humphlett, 18400 Overlook Road, Box 39, Los Gatos, CA 95030
Rate Review Committee
Green Valley Disposal Company, Gerard Wen, P.O. Box 1227, Los Gatos, CA 95031
John Snelham, 248 Old Adobe Road, Los Gatos, CA 95030
Ron O'Neill, 509 Monterey Avenue, Los Gatos, CA 95030
Reviewed by: 9,04_ Manager Clerk Finance Treasurer
COUNCIL ACTION/ACTION DIRECTED TO:
PAGE 2
MAYOR AND TOWN COUNCIL
SUBJECT: ADOPT RESOLUTION MAKING FINDINGS REGARDING THE RATE BASE FOR GREEN
VALLEY DISPOSAL COMPANY FOR 1994-1996 AND ESTABLISHING BASE RATES FOR REFUSE
COLLECTION IN THE TOWN
DATE February 3, 1995
The resolution (Attachment 1) adopts findings and decision to detail the Council's decision, so that
an adequate baseline is established for future rate adjustments. While we have tried to accurately write the
findings and decision, the Council may want to continue the matter to revise the findings and decision.
As the Council knows, Green Valley has filed a claim with the Town alleging that the Town breached
the Franchise Agreement on January 17, but without specifying any particular. The Town has also received
a number of additional letters regarding the rates and Green Valley service, which are found in Attachment
2.
Finally, while gathering the documentation for the recycling program implementation last week, we
found that Green Valley has not posted a performance bond or provided proof of insurance in accordance
with the Franchise Agreement. Staff has sent a letter to Green Valley requesting an explanation and
compliance: this may affect past and present operating expenses, because they may have been overstated
if in fact, insurance and bonds were not purchased by Green Valley.
RESOLUTION
RESOLUTION OF THE TOWN COUNCIL OF THE TOWN OF LOS GATOS
MAKING FINDINGS REGARDING THE RATE BASE FOR GREEN VALLEY
DISPOSAL COMPANY FOR 1994-1996 AND ESTABLISHING BASE RATES FOR
REFUSE COLLECTION IN THE TOWN OF LOS GATOS
WHEREAS, the Town 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 under its agreements with the Town; and
WHEREAS, the attached findings and decision reflect the analysis and conclusions
of the Town Council and are consistent with Resolution 1995-19 adopted by the Council on
January 17, 1995,
NOW, THEREFORE, THE TOWN COUNCIL OF THE TOWN OF LOS GATOS
DOES HEREBY RESOLVE 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 1.10.085 of the Town Code of the Town of
Los Gatos. 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.
ATTACHMENT 1 I+1
PASSED AND ADOPTED at a regular meeting of the Town Council of the Town of
Los Gatos, California, held on the
COUNCIL MEMBERS:
AYES:
NAYS:
ABSENT:
ABSTAIN:
SIGNED:
A I"1'EST:
day of , 199 by the following vote.
MAYOR OF THE TOWN OF LOS GATOS
LOS GATOS, CALIFORNIA
CLERK OF THE TOWN OF LOS GATOS
LOS GATOS, CALIFORNIA
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FINDINGS AND DECISION IN
1994-1995 RATE PROCEEDING REGARDING
A RATE ADJUSTMENT AND ESTABLISHMENT OF A REVISED
RATE SCHEDULE FOR REFUSE, RECYCLING, AND YARD WASTE COLLECIION
SERVICES OF GREEN VALLEY DISPOSAL COMPANY, INC.
IN THE TOWN OF LOS GATOS
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5 I. RATE -SETTING PROCESS.
6 A. This rate -setting proceeding is conducted pursuant to the authority of the Town
7 under State law, Town Code § 11.10.030, and its franchise agreement with Green Valley
8 Disposal Company, Inc. Pursuant to public utility law and the Franchise Agreement, Green
9 Valley Disposal Company [Green Valley] bears the burden of proof in demonstrating the need
10 and extent of any rate adjustment.
11 B. The Town conducted a public forum regarding the expansion of the Town
12 recycling program, the initiation of a yard waste collection program, and the rate structures that
13 might be required to support those services. Public notice was provided to each Green Valley
14 subscriber by the Town of those forums by mail and newspaper publication.
15 C. The Town Council began its hearings on the recycling, yard waste, and rate
16 structure systems in November, 1994, and has held 3 public hearings on the matter. Notice of
17 these hearings was given by mail to approximately 500 people as well as newspaper publication,
18 and information from Town staff was widely disseminated by the Town.
19 D. The Town received extensive public comments, both oral and written, during the
20 public forum and public hearings, and the Council has considered all of those comments and
21 concerns. The Town has also provided Green Valley with approximately 12 months to respond
22 to the concerns expressed by the performance audit performed in conjunction with this rate-
23 setting, 5 years to respond to concerns about soaring disposal surcharges, and almost 12 months
24 to respond to concerns expressed by the Rate Review Committee concerning financial
25 information and rate schedules.
26 E. During the current rate -making proceeding, Green Valley has not presented the
27 Town or the Council with a rate adjustment application or an adequate Schedule of Rates.
28 Instead, the Town in cooperation with the other 3 West Valley jurisdictions has spent hundreds
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EXHIBIT A
of hours of staff and consultant time attempting to determine what rates should be esta' Zed
for the provision of refuse collection services.
F. The information provided by Green Valley to the Rate Review Committee, Town
staff, and the Town Council has been incomplete and inadequate to resolve the significant
issues presented, was received only after repeated requests by staff, and has not given the
ratepayers an appropriate opportunity to comment or examine the performance of Green Valley
or its assertions of profit entitlement.
G. Green Valley's audited financial statements as of June 1994 were not made
available to the Town until December 1994, and then only when the Town requestA them
directly from the Company's offices.
H. Green Valley did not provide information to the general public regarding the
proposed rates. Instead, the Town had to bear the costs of mailing rate information, fielding
phone and written inquiries, and conducting the community forum and hearings regarding the
rates.
I. During the course of this rate proceeding, Green Valley filed suit against t 'ity
of Monte Sereno over its 1994 rate decisions. Even before the Town's and Saratoga's rate
proceedings concluded, Green Valley filed a claim against both the Town and the City of
Saratoga alleging that the municipalities' respective contracts had been breached. This
approach to rate proceedings by Green Valley has not been helpful.
II. FRANCHISE HISTORY.
A. In 1983, the Town of Los Gatos entered into a Franchise Agreement for a 20-year
period that granted Green Valley the exclusive right to provide refuse collection services in the
Town 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 Town as defined in the Franchise Agreement. At the same time that
the Franchise Agreement was approved, the Town approved refuse collection rates for Greer.
Valley's services.
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B. At the same time that the Franchise Agreement was approved, the Town
approved an agreement with Guadalupe Rubbish Disposal Company, which was and is wholly
and privately owned by the same 4 shareholders who wholly and privately own Green Valley.
C. The Franchise Agreement provides that Green Valley's rate adjustment
applications during the term of the franchise are to consist of certain designated items and be
subjected to review and comment by a Rate Review Committee consisting of a member from
each of 4 West Santa Clara Valley jurisdictions (Town of Los Gatos and the Cities of Campbell,
Monte Sereno, and Saratoga) that share related refuse collection situations.
D. The Rate Review Committee is to consider the following in reviewing the
proposed schedule of rates:
i. The acceptability of expenditures, performance incentives and sanctions,
rate comparability, and other information as the Committee determines to be
appropriate.
ii. When determining the profit level, use the operating ratio method with a
five (5) percent after-tax return (excluding tax credits and operating losses) as a
guideline.
iii. When calculating the revenue side of the operating ratio, exclude:
(a) Prior years' earnings from short-term investments generated from
prior profits or retained earnings in each fiscal year;
(b) • Tax credits; and
(c) Prior year net operating losses.
E. The Committee's recommendation is then to be forwarded to the Town Council
23 for consideration and determination of what are the proper expenses to be used in the
24 calculation of a rate base after Green Valley has been given a chance to provide documentation
25 to the Town, and for a determination of what rate adjustment if any is to be made.
26 F. The 1983 rate -setting resulted in a small profit in 1983-1984 to Green Valley,
27 which it reported at .7% for the 4 or 5 jurisdictions as a whole.
28 G. Green Valley then sought a rate adjustment in 1984, which resulted in an after-tax
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profit from the five affected jurisdictions of some 11.3% in 1984-1985 and 2.5% in 1985-1986.
H. Green Valley was granted a rate increase in 1986, which resulted in ai ,ax
profit of 11.6% in 1986-1987, 12.8% in 1987-1988, and 4.7% in 1988-1989 from service in the
Town of Los Gatos, according to Green Valley's own reports.
I. Green Valley's operations were subjected to a performance audit in 1988 by
Arthur Anderson as provided in the Franchise Agreement. The audit concluded that the
profits that Green Valley was making usually exceeded the 5% guideline and that revenue and
expenditure projection information supplied by Green Valley was inadequate to implement the
franchise language. In addition, Arthur Anderson was unable to determine from Green Valley's
financial statements how much profit was attributable to each of the 4 Green Valley franchises
or to non -franchise activity.
J. In 1989 and 1990, a new rate -making approach was developed to dampen the,
effect that soaring disposal surcharges caused. A stand-alone approach to rates was adopted.
in 1990 and reapplied in the 1992 rate -making. During these years, Green Valley reported the
following after-tax profits from its Los Gatos operations: 1989-1990, a loss of 2.7%; 1990-1991,
unreported; 1991-1992, 2.2%; 1992-1993, 4.0%.
K. Over the franchise period in which Green Valley is able to provide financial
information that estimates the expenses and revenues attributed to Los Gatos service, Green,
Valley has been able to average a 5.5% after-tax, net profit per year according to its own
calculations.
L. In 1994, the Council sought public bids for a contractor to provide collection
services of a wide variety of recyclable materials and yard waste, and after considering the bids
received, the Town awarded a contract for recycling collection and a contract for yard waste
collection to Green Valley. Those contracts are separate from the Franchise Agreement, but
the rates to support those services are established through the Franchise Agreement rate
proceeding.
M. The current rate -setting proceeding was made a part of the routine 5-year
performance audit under the Franchise Agreement. The performance audit was paid for by the
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ratepayers from the 4 West Valley jurisdictions and a portion of the County of Santa Clara, and
was conducted by Hilton Farnkopf & Hobson. The performance audit was approved by the
Council on December 5, 1994, while reserving consideration of the operating ratio issues.
Green Valley disputed a number of recommendations contained in the performance audit as
discussed below.
N. The Rate Review Committee then developed a rate base analysis for each
jurisdiction and recommended rates for each jurisdiction. The report of the Rate Review
Committee was accepted by the Council on January 3, 1995. The Committee Report contained
a number of rate base alternatives, and this decision determines which alternatives are to be
applied in the Town.
12 III. ALLOWED EXPENSES.
13 A. The Council confirms the normal operating expenses involved in service by Green
14 Valley in the Town with the following disallowances:
15 $20,584 of administrative expenses allocable to services performed by the Green
16 Team, which does not serve the Town;
17 $3,067 in employee costs also allocable to the Green Team;
18 Approximately $6,974 in advertising and promotional expense that is unnecessary
19 due to the exclusive nature of Green Valley's franchise;
20 Consultant fees as described in Section (V) below;
21 An $80,000 increase in salaries not proposed until the end of the rate proceedings
22 in December 1994 by Green Valley, which was not documented or justified, and
23 which would go to shareholders.
24 B. The rate base approved for 1993-1994 and 1994-1995 consists of labor, operating
25 costs, depreciation and interest, administrative costs, disposal fees, and franchise fees as
26 presented in the performance audit and as may be more fully described in these findings.
27 C. Disposal fees plus surcharges for 1993-1994 were as follows: $43.55 per ton
28 effective July 1, 1993; $42.36 per ton effective October 1, 1993; and $42.95 per ton effective
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January 1, 1994. Disposal base rates for 1994-1995 are set at $26.60 per ton and -)sa
surcharges are set at $16.36 per ton. Projected tonnage for the Town of Los Gatos for 1994.
1995 is 31,849 tons.
D. The total approved budgets for 1993-1994 and 1994-1995 for the 4 West Valle‘,
municipalities are set forth in Attachment 1 to these findings. These budgets are approved for
illustrative purposes only, because each of the other jurisdictions holds separate franchises and
authority to regulate Green Valley. The approved budgets for 1993-1994 and 1994-1995 for
services in the Town of Los Gatos are set forth in Attachment 2 to these findings. The
approved budgets for 1994-1995 were developed by applying the annual escalation factors as
listed in the performance audit to the costs in each category and consistent with the ongoing
requests of Green Valley for use of these types of factors.
IV. FRANCHISE FEES.
A. Over the life of this franchise, the Town has calculated its franchise fees on all
revenues of Green Valley, including the franchise fees themselves. This appears to dou -ee
Green Valley and the ratepayers, and therefore, this rate setting ends that practice. Franchise
fees for the Town will be calculated solely on gross revenues without double -counting the
franchise fee itself. This will result in a reduction in revenue to the General Fund of the Town
of some $38,400 in 1993-1994 and $37,100 in 1994-1995, or roughly $37,000 thereafter, which
will be direct savings to the ratepayers.
V. 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-house
expertise to adequately participate in a rate adjustment proceeding without consultants; this is
particularly true because of the time devoted to Green Team activities. Green Valley has the
obligation under Section 5(D) of the Franchise Agreement to prepare its rate applications and
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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 nc
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 Town Council on November 21, 1994. It
testimony focused on the profit entitlement of Green Valley and payment of its own fees as ar
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, improvec
container services, ratemaking alternatives, or other central issues in this ratemakin
proceeding. BCI conducted no community outreach efforts and did not participate in an
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 November 21 meeting, BCI did not make any presentation to the
Council or the public. It is therefore inappropriate for the ratepayers to bear the costs of thi.5
consultant work.
C. In addition, the one-time waiver in this rate -making proceeding of the
17 requirement that Green Valley complete and file a comprehensive application for a rate
18 adjustment means that Green Valley has avoided the non -recoverable expense of preparing anc
19 processing such an application. Instead, the ratepayers and the general funds of the West
20 Valley jurisdictions, and .of the Town in particular, have had to bear the brunt of this.
21 proceeding.
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23 VI. LEVEL OF PROFIT.
24 A. Green Valley contends that it is entitled to a 5% after-tax profit each and ever)
25 year of the franchise. Such an interpretation is inconsistent with the terms of the Franchise
26 Agreement, the best interests of the ratepayers, and the history of the franchise since 1983.
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B. Green Valley made such large surplus profits in the mid-1980's from its franchise
28 in the Town of Los Gatos that it voluntarily allowed some of those surplus profits to be devotec
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to holding the rates of service down for a short period of time. However, none of that lus
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 shortfalls 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, and Green Valley sought
an interim rate increase in 1993 for the 1993-1994 year, which was delayed in order to complete
an adequate audit of the service. On the other hand, Green Valley has not provided the Town
with any evidence that these shortfalls were necessarily incurred or that Green Valley made any
efforts to reduce the alleged shortfalls. Given this situation, the Town finds that the estimated
shortfall in profit from service in Los Gatos is $155,105 for 1992-1993, $239,765 for 1993-1994,.
for a total figure of $394,870.
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 en
Valley should be allowed to take out of the Los Gatos service.
D. Green Valley's refuse collection service in Los Gatos continues to involve almost
no risk and almost no capital investment. 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 determined by the auditor to be acceptable, the provision of financial
information, rate justification, and public information on proposed rates has fallen short of a
reasonable standard. Therefore, it would be appropriate under the franchise for the Town to
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apply a less-than-5% profit for the coming rate cycle. However, because of the volatility and
uncertainty of refuse collection during the coming 12 to 36 months as recycling and yard waste
collection develop in the Town, the Council is willing to allow the 5% after-tax profit on
designated expenses.
F. In resolving the issue of a shortfall in Green Valley's profits during 1985 to
6 present, Green Valley shall not be allowed an after-tax profit in excess of 5% until at least such
7 time as the next rate adjustment occurs. Any profits earned in excess of the 5% until the next
8 rate adjustment shall go to fund the balancing account established in Section VIII of this rate-
9 making. Should that balancing account deficit be paid off before the next rate adjustment, any
10 profits above the 5% profit allowance shall be deposited in an investment quality account for
11 the purpose of reducing the rate adjustment required by Green Valley during the next rate
12 adjustment. Principal and interest derived from that account shall be used to benefit the
13 ratepayers. The status of the Town of Los Gatos balancing account shall be separately itemized
14 and reported on an annual basis to the Rate Review Committee in Green Valley's financial
15 statement and audit pursuant to Section 7 of the Franchise Agreement.
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17 VII. EXPENSES ON WHICH PROFIT IS TO BE BASED.
18 A. FRANCHISE FEE$. Green Valley has requested the Town to continue to
19 authorize Green Valley to take a profit on the franchise fees imposed by the Town under the
20 Franchise Agreement. Such a profit calculation does not seem to make sense, because the
21 Franchise Agreement calls for the franchise fees to be charged on gross revenues, apparently
22 including Green Valley profit. However, profit has been allowed on franchise fees since 1983,
23 and there is no evidence that any aspect of the franchise fee or its basis has significantly
24 changed since 1983. Therefore, the Town will continue to allow the Town franchise fees to be
25 included in the calculation of the operating ratio and allowable profit for Green Valley.
26 B. DISPOSAL. BASE RATES. Green Valley has requested the Town to continue
27 to authorize Green Valley to take a profit on the disposal base rates charged to Green Valley.
28 Refuse is usually disposed at the Guadalupe Landfill, which is wholly owned and operated by
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the Guadalupe Rubbish Disposal Company. The allowance of profit on these base r2 's a
difficult question. Green Valley bears little risk with regard to these base rates, because the
Town has separately contracted with Guadalupe to allow Green Valley to dispose of as much
refuse and trash as Green Valley delivers from the Town. Green Valley expressly disclaims any
contractual relationship with or ability to influence any operation or charge of Guadalupe. In
addition, Green Valley has no incentive to seek alternative disposal sites because of the Town
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 Town has designated a disposal site. As with franchise fees, the Towr
has allowed profit on disposal base rates since the inception of the franchise in 1983, anc
disposal base rates have not increased dramatically since that time. Therefore, the Town wil.
continue to allow the disposal base rates to be included in the calculation of the operating ratio
and allowable profit for Green Valley.
It is noted that Green Valley was unable to satisfy the Council's and public's concern!
about the handling of yard wastes and assessment of costs by Guadalupe Rubbish I )sa
Company. Green Valley asserts that it has no contractual relationship and no influence ove.
the Landfill Company. Instead, Green Valley asserts that the Town alone bears responsibilir
for disposal through its contractual arrangements, and Green Valley is merely a delivery service
subject to Town direction in landfill matters.
C. DISPOSAL SURCHARGES. Green Valley has requested the Town to resume
authorization of Green Valley taking a profit on the disposal surcharges passed through Gree:
Valley.
At the time that the Franchise Agreement was signed, there were no surcharges o
disposal base rates. The first surcharge on solid waste disposal was imposed in 1987-1988, an
the total of all such surcharges remained de minimis at less than $1 per ton until 1990-1991.
The surcharges on the disposal of refuse then soared dramatically beginning at $5.08 pe
ton, to $15.99 per ton in 1992-1993, and reached $16.36 per ton in 1994-1995. The princip
contributor to that increase has been the imposition of a disposal tax by the City of San Jos4
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18 VIII. BALANCING ACCOUNT.
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 Town 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 Town
of Los Gatos.
In addition, the Town along with a number of other municipalities have filed suit in a
California Superior Court seeking to overturn the City of San Jose surcharges, and the Town
has incurred significant legal expense in that proceeding. Green Valley has neither joined nor
supported that litigation in any way.
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
disallowance should not continue. Therefore, no profit on disposal surcharges will be allowed
to Green Valley, but Green Valley will be allowed to recover its actual expenses for such
surcharges.
19 A. According to Green Valley's testimony, the theory that there may be a balancing
20 account deficit evolved from the rate -making in 1992, in which a standalone year was used to
21 set rates. Green Valley asserts that its profits fell short of the 5% mark during the years 1992-
22 1993 and 1993-1994. Green Valley's representative, Gerard Wen, testified that following the
23 conclusion of that rate -making, Green Valley spoke to one or another unidentified city manager
24 who apparently assured Green Valley that the next rate -making would make up a profit
25 shortfall. The Town Council neither received any notice of such a side agreement nor agreed
26 to such a rate system.
27 B. A balancing account system is inconsistent with the terms of the Franchise
28 Agreement, which requires Green Valley to provide a 3-year budget as part of any rate
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adjustment application. Green Valley has not been able to provide such a 3-year budge ing
this proceeding. Town staff hypothesized that the reason for this was that the recycling and
yard waste programs leave a large number of variables in any such budget, so that it is very
difficult to predict the revenues and revenue sources; however, neither Green Valley nor its
consultants, BCI, have provided the Council with a 3-year projection.
C. Green Valley demanded that the ratepayers of the Town pay off the "balancing
account" deficit in a single calendar year. Green Valley estimated that this would require an
additional 100% increase in refuse collection rates above the staff recommendation, from $6.65
per can now to $21.50 per can under Green Valley's proposal. Without any financial analysis.
Green Valley argued that if the Town failed to grant this immense increase, G en Valle
would be unable to obtain credit lines from banks and might operate at a loss. The audited
financial statements of Green Valley prepared by Hood & Strong, Green Valley's own audit
firm, show that Green Valley has made a significant profit in both 1993 and 1994, and that
Green Valley holds a largely unused line of credit of approximately $500,000. Green Valley
has not provided any cash flow analysis that indicates that Green Valley has any fore ble
expenses that would jeopardize its financial position should any such "deficit" be paid off by the
ratepayers in a measured time period of 41 months, consistent with. 3-year budgeting set
forth in the Franchise Agreement. Should Green Valley actually . r financial jeopardy.
Green Valley is free to apply for rate relief at any time.
D. Green Valley also demanded a higher calculation of a "deficit" than the Council
is willing to award. Green Valley has averaged a 5% annual, after-tax profit over the life of
the franchise. Green Valley's calculations discount its excess profits in the 1980's and its usage
of excess revenues from Los Gatos service to reduce rates in Saratoga. The ratepayers of the
Town of Los Gatos owe no more than an average 5% profit and the reasonable "deficit'
amount determined in this Decision by the Council will bring Green Valley up to or above ar
average 5% profit for the franchise to date.
E. Green Valley also demanded that the ratepayers pay interest on the unpaic
"balance" in the deficit of the balancing account. Green Valley conceded th it had no
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attributed any interest to the excess revenues it had received in the 1980's from Los Gatos
ratepayers but the loose oversight in effect at that time allowed those excess revenues to be
diverted in part to support lower rates in Saratoga. Therefore, there is no quid pro quo to be
served by awarding interest to Green Valley on this supposed deficit, and no interest will be
awarded.
F. Green Valley's audited financial statements prepared by Hood & Strong, Green
Valley's auditors, do not disclose or note any balancing account, account receivable analogous
to a balancing account, or any debit or credit related to any such balancing account.
G. It is the intention of the Council to eliminate the use of a balancing account and
fully return the franchise to the original requirements for a 3-year rate -setting in which Green
Valley bears risk and is rewarded for efficient performance, and the Council hereby revokes any
waiver that may have occurred with regard to the requirement of a 3-year budget submittal by
Green Valley as the basis for rate adjustments. Therefore, the current rate -setting adopts the
balancing account system set forth in Attachment 3 only until such time as the compromised
amount is paid as shown in the Exhibit.
16
17 IX. TAX RATE FOR CALCULATION OF AFTER-TAX PROFIT.
18 A. Green Valley has an obligation to the ratepayers to seek and use the most cost
19 effective tax basis available. The Town has neither dictated nor approved any particular tax
20 status during the franchise history.
21 B. Green Valley is unable to divulge what its actual income tax rates or payments
22 have been or are estimated to be. Instead, it has urged usage of a top bracket rate of between
23 45 and 49 percent. This is based on Green Valley's current status as an S-Corp, which means
24 that the 4 individual shareholders are taxed, rather than the corporation. Green Valley is not
25 entitled to attribute more than its actual tax expense in calculating an estimated after-tax profit.
26 The Consultant who performed the performance audit recommended that a tax rate of 35% be
27 used.
28
C. The Town contacted the California Public Utilities Commission to determine what
13
1 the normal practice was with regard to privately held corporations, and the PUC app a
2 standard C-Corp so that issues of highly individualized income tax brackets, affluence, poor tax
3 planning, and so forth do not control the rates charged and penalize the ratepayers.
4 D. The Town presented Green Valley with a 40.138% tax estimate which would
5 account for a standard Federal and State C-Corp income tax bracket. Green Valley had no
6 opposition or evidence to offer in opposition to that estimate. Therefore, the tax estimate for
7 this rate setting to be used in calculating the after-tax profit shall be 40.138%.
8
9 X. DIFFERENTIAL RATES.
10 A. Many members of the public requested that Green Valley provide rates that
11 would differentiate on the basis of amounts or types of refuse as well as types of residential
12 structures. Green Valley reported that its accounting systems required manual input and did
13 not have the necessary flexibility to make these alternatives cost effective. In addition, Green
14 Valley reported that use of a mini -can rate would not create meaningful savings, and other
15 ratepayers would bear the costs of providing that service. Green Valley did not have ost
16 effective means of supervising composting customers, and once again the other rate payers
17 would bear a heavy burden for providing such an exemption. Green Valley further reported
18 that technology might lead to the use of a system that would weigh individual garbage upor
19 pick-up and provide a billing system that would charge by weight, which is the ultimate goa
20 imposed by the State Legislature for solid waste reduction; however, such a system is in th+
21 distant future.
22 B. Therefore, the Council finds that a senior citizen/disability rate available only t
23 those receiving Supplemental Security Income from the Social Security Administration
24 approved as shown on Attachment 4, so that this rate adjustment will not have too severe a
25 impact on those least able to pay.
26 C. However, the need for recycling, yard waste disposal, and reduction in the sol
27 waste stream is community -wide, which everyone must share. The proposed rates and the wic
28 array of services that will follow make the rate structure among the very lowest in the S;
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Francisco Bay Area. A share of the residential cost is already being borne by the comrnercia
sector. It would not be fair to families and large households to unduly penalize them and tc
increase rubbish collection rates by another 100% to provide a small benefit to those whc
reduce their trash flow. Because the Town does not require trash collection subscription, there
are a wide variety of private efforts and arrangements that can be made that would not unduly
penalize the majority of ratepayers.
D. Therefore, for the current rate -making the rate schedule attached hereto a
Attachment 4 is adopted. However, the Council will welcome any future proposals that woulc
reward persons who reduce their solid waste stream so long as they do not unduly penalize
normal users who have little or no choice in reduction. The Council expects that Green Valle\
will take the Lead in seeking such solutions. In addition, it is hoped that the recycled yard waste
will be returned to residents as compost.
XI. CONDOMINIUM/TOWNHOME COMPLEXES.
A. The Council received a great deal of public comment regarding recycling and yarc
waste collection in the condominium and townhome complexes. Green Valley assured the
Council that it has a program in place to address these concerns and will pursue outreacl-
programs to address these concerns and not double charge for such service. Green Valley
unable to obtain the cooperation of Guadalupe Rubbish Disposal Company in creating a viable
yard waste acceptance program at the Landfill. It is also noteworthy that other service
providers can establish yard waste receiving facilities in Town without interfering with Green
Valley's collection contract with the Town.
B. Green Valley has assured the Council that the public's concern on these matters
will be resolved.
25
26 XII. OPERATING RATIO.
27 A. The ultimate result of the decisions made in this rate -setting is that an operating ratic
28 of approximately 93.3% on all expenses will be established for 1993-1994 and 1994-1995.
15
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B. These operating ratios are consistent with the operating ratios throughout Ba
Area, and Green Valley has not demonstrated any demand from investors, banks, or potentia
purchasers for any different operating ratio.
C. These operating ratios will provide Green Valley with a fair and reasonable rerun
on expenses.
XIII. RATES ARE JUST AND REASONABLE TO THE RATEPAYERS.
A. The rates established in Attachment 4 are just and reasonable to the ratepayer
in the Town of Los Gatos.
XIV. 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 Saratoga, Monte Sereno.
or Campbell, 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 Town of Los Gatos 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 Town 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 incorrect or untrue, the Town 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
Committeemembers, 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.
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D. Under the State Government Code and the Town of Los Gatos Town Code, any
amendment to the Franchise Agreement or any agreement between the Town and Green Valley
requires the authorization of the Council.
E. The rates established by the Town and the approved budgets for Green Vallev1
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.
17
ATTACHMENT 1
TOTAL APPROVED BUDGET FOR GREEN VALLEY
FOR FISCAL YEAR 1993-1994
(FOR ILLUSTRATION PURPOSES AS THE OTHER 3 WEST VALLEY
JURISDICTIONS SEPARATELY CONTROL THEIR BUDGETS AND RATES)
LABOR
OPERATING COSTS
DEPRECIATION
AND INTEREST
ADMINISTRATIVE
COSTS
SUBTOTAL
DISPOSAL COSTS
FRANCHISE FEES
TOTAL OPERATING
EXPENSES
PRE-TAX PROFIT
INCOME TAXES
AI. 1 ER -TAX
PROFIT
$ 3,960,451
1,642,745
655,024
437,396
$ 6,695,616
$ 4,427,815
* 1,29L007
$12,414,438
$885,743
**(355,520)
530,223
+- * Green Valley underestimated fees in its proposed budget by $36,336
**
Assumes that the other 3 jurisdictions adopt a 40.138% tax rate, over which the
Town has no control
18
ATTACHMENT 1
"Tb EC,t1#&r A
TOTAL APPROVED BUDGET FOR GREEN VALLEY
FOR FISCAL YEAR 1994-1995
(FOR ILLUSTRATION PURPOSES AS THE OTHER 3 NEST VALLEY
JURISDIC:IIONS SEPARATELY CONTROL THEIR BUDGETS AND RATES)
LABOR
OPERATING COSTS
DEPRECIATION
AND INTEREST
ADMINISTRATIVE
COSTS
SUBTOTAL
DISPOSAL COSTS
FRANCHISE FEES
TOTAL OPERATING
EXPENSES
PRE-TAX PROFIT
INCOME TAXES
AFTER-TAX
PROFIT
**
$ 4,038,425
1,700,241
655,024
455,564
$ 6,849,254
$ 4,664,081
1.242.763
$12,756,098
$914,290
* *(366,978)
$547,312
Assumes that the other 3 jurisdictions adopt a 40.138% tax rate, over which the
Town has no control
19
ATTACHMENT 2
TOTAL APPROVED BUDGET FOR GREEN VALLEY
FOR FISCAL YEAR 1993-1994 FOR SERVICE IN THE TOWN OF LOS GATOS
LABOR $ 1,250,534
OPERATING COSTS 531,739
DEPRECIATION 202,566
AND INTEREST
ADMINISTRATIVE 125,778
COSTS
SUBTOTAL $ 2,110,617
DISPOSAL COSTS $ 1,321,721
FRANCHISE FEES 370,707
TOTAL OPERATING $ 3,803,046
EXPENSES
PRE-TAX PROFIT $274,732
INCOME TAXES (110,272)
AFTER-TAX $164,461
PROFIT
20
ATTACHMENT 2
'Ta EX Mar&
TOTAL APPROVED BUDGET FOR GREEN VALLEY
FOR FISCAL YEAR 1994-1995 FOR SERVICE IN THE TOWN OF LOS GATOS
LABOR $ 1,294,549
OPERATING COSTS 550,454
DEPRECIATION 209,696
AND INTEREST
ADMINISTRATIVE 130.205
COSTS
SUBTOTAL $ 2,184,904
DISPOSAL COSTS $ 1,368,242
FRANCHISE FEES 383.755
TOTAL OPERATING $ 3,936,901
EXPENSES
PRE-TAX PROFIT $284,402
INCOME TAXES (114.1531
AI-1 ER -TAX $170,249
PROFIT
21
Town of Los Gatos
Balancing Account 3-Year Amortization Schedule
1994-95 1995-96 1996-97 1997-98
Revenue from 4,176,365 3,622,069 5,622,069 6,122,433
Current Rates (b)
Revenue 4,979,552 5,558,262 5,752,801 5,954,149
Requirement
Current
Surplus/ (Deficit)
Beginning
Surplus/(Deficit)
Interest on BA
(803,187) 63,807 (130,732) 168,284
(394,870) (595,680) (531,873) (162,242)
Ending Surplus/ (1,198,057) (531,873) (662,606) 6,042
(Deficit) before rate adj.
Amortized Portion (a) 602,377 0 500,364 0
Ending Surplus/ (595,680) (531,873) (162,242) 6,042
(Deficit)
Required Rate 24.10% 0.00% 8.90% 0.00%
Adjustment
Assumptions:
Operating Ratio
Inflation Rate
Interest Rate
5.00% after-tax profit on op. exp. excl. disposal surcharges
3.50%
8.75%
1994-95 rate adjustment effective 2/1/95
No rate adjustment on 7/1/95
1996-97 rate adjustment effective 7/1/96
1994-95 revenue requirement includes 5 months of g/w and recycling
1995-96 revenue requirement and beyond includes 12 months of g/w and recycling
(a) 1994-95 amortization includes an additional $183,000 generated from residential rates
(b) 1995-96 revenues and beyond include an additional $439,200 from residential revenues
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ATTACHMENT 4
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Exhibit C
Page 2
DOB rates reflect a policy of having the DOB customers pay for the weight of debris. Accordingly,
customers wV! be charged S52.00 per ton for the weight over the Mowed limit. Since disposal fees
are based on weight, this system provides equity.
CUBIC YARDS PRICE ALLOWED WEIGHTS
18 S362 1.5 tons
30 5510 4 5 tons
40 S575 5.5 tons
6 $396 N/A
There is no per -ton charge for the six cubic yard box. These six cubic yard boxes are picked up by
another vehicle which picks up several of these size bins before being weighed. This means the
customer can put out as many tons as s/he can fit into the six cubic yard box. The price is set so
that there are enough revenues to pay for the tipping fee on the expected tonnages
C SD 19: k \ wildwst\dobohart sum
ATTACHMENT 4
EXtiigfl
JAN 2 7
January 25, 1995
Ms. Regina A. Falkner,
Community Services Director
Town of Los Gatos
110 E. Main Street
Los Gatos, CA. 95030
RE: Green Waste Disposal
Dear Ms. Falkner,
On behalf of the homeowners of Los Gatos Woods, I thank you and the
Town Council members for considering the special circumstances of our
green waste disposal and requiring the Green Valley Disposal Company
to work with us to find a mutually acceptable solution to our
problem.
As you know, there existed a potential for us to pay both Green
Valley and our landscape contractor to provide green waste removal
services, and we do not have any place on our property to put a large
dumpster in which to collect this waste.
However, we have discussed this issue with Mr. Phil Couchee and Mr.
Mark Zanardi of Green Valley, and we have reached an agreement that
we believe is acceptable to all concerned.
The Town of Los Gatos will get credit for the recycling of all the
green waste, and neither our homeowners nor our landscape contractor
will have to pay extra to dispose of this material.
We will begin this procedure effective February 1, 1995, and we will
advise if there are any problems.
Once again, a special thanks to you and the council members for your
concern and assistance.
Sincerely,
William B. Phillips, President
Los Gatos Woods HOA
102 Abby Wood Ct.
Los Gatos, CA. 95032
Copy: Mr. Phil Couchee, Green Valley Disposal
Mr. Mark Zanardi, Green Valley Disposal
C,c '. loom t
ATTAGMMNT. 2
170 Lester Lane
Los Gatos, CA. 95032
1-21-95
Regina Falkner
110 E. Main St.
Los Gatos, CA. 95032
Dear Regina
We feel you have done a very good job on the Solid Waste reports, it must have been
extraordinarily difficult at times, and from our point of view GVDC wasn't always very
co-operative. You really got dumped on a time or two, not encouraging.
Now the worst is over you might even be able to sleep at nights!
The outcome is not "good" for any of us, but we are sure it is the fairest to the majority of the
townspeople.
Sincerely
Bill & Anne Bilkiewicz
ATTACHMENT 2
1•
January 26, 1995
Mr. Dennis Varnie, Owner
Green Valley Disposal Co.
P.O. Box 1227
Los Gatos, Ca. 95031-1227
TOWN MANAGER
T:
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125 Sioatom6:lea i'ay
lot C'-intot �.aLi f a 030
Dear Mr. Varnie
I am single living on a small fixed income. My neighbor is single
living on a fixed income. We both have garden service, therefore
we do not create yard trash and create very little garbage.
I don't take the news paper, therefore I don't create any paper. My
neighbor takes the news paper and creates about one small box a week.
Between us we have about one small box of bottles (plastic/glass) and
cans per month.
Since we are both on a fixed income would Green Valley Disposal Co.
consider picking up garbage at one address only so my neighbor and I
can share the bill?
1 a- (4),
We are being squeezed to death with bills. Your rate increase effective
February 1, 1995 of $15.75 per month compared with current $6.65 for the
same service is ludicrous.
Sincerely yours,
Howard G. Theobald
cc:
David W. Knapp,Los Gatos Town Manager
Susan Hammer, Mayor, City of San Jose
Jim Cunneen, Assembly Member Twenty -Fourth District
Norman Y. Mineta, Congress of The United States
Connie Skipitares, San Jose Mercury News
Dale Bryant, Editor Los Gatos Weekly -Times
ATTACHMENT 2
eAret
TOWN MANAGER
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ATTACHMENT. 2
Account No. 1900637
January 30, 1995
Green Valley Disposal Company, Inc.
P.O Box 1227
Los Gatos, Ca.
95031
Steven A. McDonald
205 Caldwell Ave.
Los Gatos, Ca. 95032
7---
"S • FEB —1!
Dear Sirs:
This letter is a STRONG protest against the new collection rates and service. Presently I am paying
$59.85 for three cans every three months. With the new rates, I will be paying $151. 17. This is
almost three times the present rate and is totally unacceptable.
I tried to call all day long on January 30, 1995, but got busy signals each time. For an age of
communications, this is also unacceptable. You should at the very least have an answering service that
can either take messages or put the caller in a queue.
I do NOT want the large brown 96 gallon container. We have a very small lot, and there is no place to
put this where it would not be an eye sore. I will NOT be using this container, as I have a gardener
that comes weekly and takes away the clippings. Even when we didn't have a gardener, I never had as
much clippings as you suggest in your letter.
Consequently, I would like the following performed:
a) Reduce the number of cans from three to two.
b) Let me know when you want me to place the large 96 gallon container out for you to pick up
and take away.
c) Reduce our monthly fee to compensate for not using the 96 gallon container.
I am sending a copy of this letter to the Town of Los Gatos as well.
I would appreciate a quick response to the above. Could you please send me correspondence that indicates
you have addressed the above requests.
Thank -you for your quick response.
Sincerely,
CC
Town Of Los Gatos
ATTACHMENT. 2
�C. - tC
123 Vasona Oaks Drive Ot3
.jAN 2
Los Gatos, CA 95030
January 27, 1995
Town Council
Re: Garbage Rates
Dear Town Council Members:
You have just approved raising the garbage rate 137% on my
stre& without doing anything additional for us! We are a planned
development and pay our gardening service to dispose of our yard
clippings. If our service pays more to recycle those materials the
cost gets passed on to us. We pay twice!
The CPI is up about 2% this year. You are raising our rates 68
times as much as the CPI!!! Green Valley Disposal was in
business for profit prior to this rate hike. It was unconscionable
for you to raise rates on PUD's that haul their own yard clippings
the same as everyone in single family neighborhoods. We do not
need nor will we accept 96 gallon recycle bins. No garbage
company money will be spent on the additional recycling in this
development.
All the PUD's in Los Gatos represent a sizeable portion of your
constituency. Perhaps we need better representation.
Sincerely,
4—LAI
Harvey Orndorf
408 358-1111 X 106
cc: David Knapp
Los Gatos Weekly
ATTACHMENT 2
January 5. 1995
JAN j
Da\ c Knapp. Town Manager
T. ,cc n , Nt Los Cato.
Los Gatos. C.a. 95030
RE. New garbage recycling program.
Dear Da' e.
A, .a single u„man. 1 ha\c worked kcn hard it' maintain. improne and keep my hi 'me in Los Gatos !especially :liter sustaining he:i
earthquake damaec i...\. a homeow nor in L. Gatos since 1976. . 1'c e rev er w rtuen to request help. until now . But I hays encountered a
problem in trying to comply pith the new recycing requirements. I am requesting the To n's help in the follow ing matter.
`lv house on Rose .-Avenue is at the end of a 180 toot -lung do enay that 1 share with my neighbor. For 19 scars. I ha\c contracted
v ith Green Valley Disposal for "remote pickup .en ice "---- a Green Valley Disposal person 'without the truck) comes up the narrow
Uri cw ay to get the garbage cans. When thc recycling of cans. `_lass and plastic bottle was initiated. I called Green Valle% and requested
remote pickup for those as w ell. I w as told that they w ouldn't do it.
Recytmg means six to eight 360 toot round tnps of garbage -carrying weekly for myself and my secondary unit. I recycle infrequently.
in good weather. when my back is not out, only plastic and alumumin. 1 have never, frankly. recycled my glass new papers.
magazines and cardboard (they arc just too heavy to carry so tar). No one should be expected to Jeopardize their health in order to cam'
irtuully all their garbage literally miles eyes month in any weather ( 8 round trips n 360 feet x 4 weeks = 11,520 feet or
approx. 2 miles). Nor should one expect a renter to do the same ( there may be liability issues for me as a landlord to request a tenant
haul their trash that distance). Further. raising the rent on y' hat is currently affordable housing to maintain the current remote pick up
sell ice is a ridiculous and unnecessary penalty.
1 recently called Green Valley Disposal hoping the expanded recycling program would necessitate a revision of their policy on remote
pickup. t got the same answer i.e. carry. all my recyclables 180 feet to the curb ....or pay the high new charges. maintain the remote
pickup service and don't recycle. I do not understand not do I appreciate Green Valley's poor approach to customer sen ice. With the
new recycling program, they will be charging me as much as I pay now for less service or more money for thc same sen ice. Green
Valley Disposal should be providing the same level of pickup service for non -recycled rad recycled material. And it they won't pro\ ide
equi\ alent pickup service for recycled matenal. then I should not be financially penalized with increased tees for non -recycled remote
pickup.
1 understand that the Town of Los Gatos, needs its citizenry to recycle and 1 want to cooperate. Ethically and morally. 1 prefer to
recycle and would do so-- it Green Valley would provide some reasonable solutions for people who don't be on normal streets. ft
doesn't make any sense, to discourage a citizen's nght actions by eliminating the service that enables and facilitates the performance of
that action.
Please help me in changing this unfair rule that Green Valley has created to its own advantage at the expense of customer service.
Sincerely.
Patncia (Patti) Wilson
15880 Rose Avenue
Los Gatos, CA, 95030
354-1964
cc: Town Council. Mayor of Los Gatos, Green Valley Disposal
TOWN MANAGER
Reco veg: - / S ' ys
To:-
[K} Atlon-1..�t
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latummeoot
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ATTACHMENT. 2