Desk Item 23a Staff Report Public Hearing to Consider Solid Waste Management Issues: a) Refuse Collection Rate BaseTOWN OF LOS GATOS
COUNCIL AGENDA REPORT
DATE: January 3, 1995
TO: MAYOR AND TOWN COUNCIL
FROM: TOWN MANAGER
SUBJECT:
COUNCIL AGENDA
DATE: 1/3/95
ITEM NO. 23 a
DESK ITEM
PUBLIC HEARING TO CONSIDER SOLID WASTE MANAGEMENT ISSUES:
a) Refuse Collection Rate Base
RECOMMENDATION:
For information, only.
DISCUSSION:
Attached are two letters provided by Green Valley. Attachment 1 was received at 5:05 pm on December 29
and Attachment 2 was received in the morning on December 30. Both items were received after the related
council reports had been completed and were not, therefore, included with the agenda packet.
Attachment 1 outlines Green Valley Disposal Company's (GVDC) position on the proposed rate base.
Attachment 2 Is a schedule of rates proposed by GVDC. Staff has not had sufficient time to analyze and
evaluate the contents.
Also attached are three letters regarding solid waste management Issues (Attachments 3, 4, and 5). At 4:00
p.m. today, staff received a response from Stephen Lankes, GVDC's attorney (Attachment 6).
ATTACHMENTS:
1. Letter from GVDC dated 12/29/94.
2. Letter from GVDC dated 12/30/94.
3. Letter from Harvey Sanner dated 12/24/94.
4. Letter from Mike Abkin dated 1/3/95.
5. Letter from Joe Venerelia dated 12/30/94.
6. Letter from Stephen A. Lankes dated 1/3/95.
PREPARED BY: Regina A. F
Community Se ",' Director
RAF:dr
csd4:A: \cnclrpts\colibase.dsk
Reviewed by: rAttomey Clerk Finance Treasurer
COUNCIL ACTION/ACTION DIRECTED TO:
Revised: 1/3/95 4:36 pm
GREEN VALLEY DISPOSAL COMPANY, INC.
573 UNIVERSITY ;AVENUE • PO BOX 1227 • LOS GATOS. CA 95031-1227 • PHONE -1081 35a-2100
December 29, 1994
David Knapp
Town of Los Gatos
110 E. Main St.
Los Gatos, CA 95032
Dear David:
In the enclosed issue sheets, I have laid out the background, historical perspective
and the rationale behind our positions.
Sincerely,
9-h-tectve(
Gerard Wen
i< 5 5-pm
1.2Atiy
TAX RATE
ELFH POSITION
HFH is recommending taking the pre-tax income, dividing it by the number of
shareholders, and then applying the individual tax table rates starting from "zero
income". The resulting taxes divided by the pre-tax income + the S-corporation tax
rate percentage = the recommended HFH tax method.
HISTORICAL
• At the inception of the franchise in 1983, GVD was a C-corporation.
• In 1987, GVD asked permission from the Rate Review Committee to convert
to an S-corporation because of tax law changes. The 1987 marginal tax rate
of the C-corporation (46%) was compared to the 1987 S-corporation (2.5%)
+ 1987 marginal tax rate of individual (38.5%) = 41%, a savings of 5% to the
ratepayers. (Note: California marginal C-corporation and marginal individual
tax rates were ignored because they were the same rates.)
The Rate Review Committee approved the request in 1987.
• The 1988 performance auditors scrutinized it and had no comments on it.
• The methodology has been in place for 7 years now and has been fully
disclosed in the annual CPA statements.
• Recent tax rate changes have resulted in the following: the 1994 marginal tax
rate of the C-corporation (including surcharges) is now 35%. The 1994 S-
corporation (1.5%) + 1994 marginal tax rate of individual (39.6%) = 41%.
• The ratepayers benefited when the individual tax rates were lower than the C-
corporation rates in 1980s onward. By all rights, the ratepayers should now
share in the higher taxes that will actually be paid. However, GVD has
offered (see proposal below) to accept the lower reimbursement based on C-
corporation tax rates that would be applicable had the S-corporation election
not been made.
• The City of Campbell rationale for providing no profit on landfill taxes is that
there were no landfill taxes in existence at the time the franchise agreement
was signed. The parties' intent was to provide profit on the landfill base fee.
Applying the same rationale that the City of Campbell used for landfill taxes,
the parties' intent at that time was the GVD would be taxed at C-corporation
rates, since the GVD was a C-corporation at the time the franchise agreement
was signed.
GVD PROPOSALS
• Beginning with FYE 6/30/94, return to using the C-corporation tax rates to
conform to the parties' intent.
OR
• Continue with the use of the marginal individual tax rate which the CPA for
the shareholders has already confirmed to HFH that it is the same as the
effective tax rate that the shareholders are actually paying at.
The intent of the GVD and the Rate Review Committee in 1987 was to use
the marginal tax rate. The marginal tax rates formed the basis for making the
change from a C-corporation to a S-corporation. HFH's recommendation is
contrary to the parties' intent.
The use of the marginal tax rates have been documented and in use since
1987. HFH's recommendation is contrary to past practices.
BALANCING ACCOUNT
HFH/RRC POSITION
The remaining amount in the balancing account was double checked by HFH to be
$910,000. On December 5, 1994, that amount was reduced to $778,000 on the
premise that the profit methodology unilaterally established by the RRC and
approved by Councils in 1992 had to be used.
BACKGROUND
• The profit methodology unilaterally established by the RRC did not
provide profit on landfill fees or franchise fees.
• This profit methodology is contrary to the parties' intent as set forth in the
franchise agreement.
• This profit methodology is contrary to past practices of 1983, 1984, 1985,
1986, 1987, 1988, 1989, 1990 and 1992.
• This profit methodology was vigorously opposed by the GVD which
culminated in legal letters and a meeting with the City/Town managers in
December 1992.
GVD POSITION
The balancing account amount should be restored to the $910,000.
PROFIT ON HFH PERFORMANCE AUDIT FEE
HFH/RRC POSITION
No profit on performance audit fee of $145,000. GVD did not expend any effort.
BACKGROUND
• Profit was allowed on the performance audit with Ralph Anderson & Co.
• Profit was allowed on the performance audit with Arthur Young & Co.
• The methodology for payment has remained the same: the GVD receives
approved invoices from the Jurisdictions and issues payment directly to the
performance auditor.
• In terms of effort as calculated by personnel time, the GVD personnel has
spent more time on this performance audit, in terms of schedules, production
of documents, discussions and meetings with various HFH staff members, 3
week of HFH field work, continued attempt to resolve various issues, etc.
then the time spent for other audits.
GVD POSITION
• Consistent with past practice, include the performance audit fee as a normal
operating expense.
ADMINISTRATIVE SALARY
BACKGROUND
• The HFH performance audit has highlighted for GVD areas such as officers
compensation where GVD is below the norm. Unfortunately, HFH has
avoided the issue.
When GVD questioned HFH about officers compensation and industry salary
surveys, HFH said that they use such surveys to reduce, not increase levels of
compensation! (Where is the concept of neutrality and unbiased work?)
• Kimmel & Associates published in Fall 1994, the Waste Industry Salary
Survey. The position of President has a salary range of $125,000 to $200,000
plus a bonus of 25% to 50%. GVD's president is more than 1/3 below the
bottom end of the salary range and he receives no bonus.
• The 1993 Robert Morris & Associates industry survey cited by HFH show
owners/officers salaries as measured as a % of revenue is 4.8% to 5.6%.
GVD's is only 1.7% of revenue.
• Deloitte & Touche, CPA performed a Northern California industry survey in
September 1994. Their survey covered waste management companies of
comparable size to GVD. The survey showed owners/officers salaries to be
6.2% of revenue. Again GVD's is only 1.7% of revenue.
• HFH has often cited a 1990 Inc. magazine survey to support their
recommendations to reduce owners/officers salaries. According to this
survey, GVD owners/officers compensation, adjusted for inflation should be
more than $450,000. GVD owners/officers salaries are less than '/z of it.
GVD PROPOSAL
• Increase administrative salary by a nominal $80,000.
GREEN VALLEY DISPOSAL COMPANY, INC.
ifnc 1v1,1f4dlt
573 UNIVERSITY AVENUE • PO BOX 1227 • LOS GATOS. CA 95031-1227 • PHONE (408) 354-2100
December 30, 1994
Town of Los Gatos
Regina Falkner
110 E. Main Street
Los. Gatos, CA. 95030
Dear Regina,
Enclosed for your consideration is a schedule of proposed rates that are contractually correct and
follow past practice.
The proposal assumes the following:
1. Your allocation of 1-can customers among flatland and hard -to -serve as provided to Green
Valley on December 22, 1994 using your additional distance charge.
2. Provision of 5% after-tax profit on all costs.
3. Use of marginal tax rate for calculating the after-tax profit.
4. 41-month repayment of Los Gatos' share of the $910,000 balancing account.
5. Inclusion of the 6/30/94 shortfall, also spread over 41 months.
6. Using HFH estimated tonnage of 108,568 tons
7. Using HFH tipping fee of $42.59
8. Switching DOB to a base fee + excess tonnage fee ($52.81/ton).
The final 1-can flatland rate is $21.50. For your information, if there were no amounts owing
from prior years, the 1-can rate would have been $20.00, assuming commercial and DOB
remained as proposed
Please call if you have any questions or comments.
Phil Couchee
P.S. If you are relying on HFH's 12/28/94 worksheets for your rates, please note that there are
computational errors that directly affect the rates which will be derived from these numbers. I am
enclosing a carbon copy of what Gerard sent to Bill Helms today.
P.S.S. Your rates are going up for 4 reasons:
1) Allocation of costs have shifted from Saratoga to Los Gatos
2) The expanded recycling programs
3) Migration to 1-can service, resulting in fewer cans for cost distribution
4) No rate increase since July of 1992
a
GREEN VALLEY DISPOSAL COMPANY, INC.
573 UNIVERSITY AVENUE
°'aOo*
Mark Ochenduszko
City of Campbell
70 N. First St.
Campbell, CA 95008-1423
Dear Mark:
t,Ql- 0cr.d
cf l2{7C(4Y
• PC. 3OX • GCS CATCS. CZ 95C31 122. • PHONE AC5 __ 2.00
December 30, 1994
In the enclosed issue sheets, I have laid out the background, historical perspective
..and the rationale behind our positions.
S incerely.
Gerard Wen
cc: Bill Helms
P.S. Yesterday we received HFH's worksheets dated December 28. 1994 from
Bill Helms. The list of errors we pointed out to Bill Helms on December 22_
1994 which Bill faxed to Scott Hobson at HFH has NOT been corrected on
this latest fax:
1) We provided HFH with actual 1993/94 numbers (most recently on
11/ 1/94). Campbell's worksheets do not reflect it which impacts
1994/95 and 1995/96.
2) The "disposal expense (pass -through)" for 1993/94 should be
S1,415,965. HFH continues to use the wrong number of $I,686,198.
Additionally, the total consulting fees is $96,157 for 1993/94 (West Valley
portion is $93,006), not $92,738 that Scott Hobson has in his 12/28/94
worksheet_
The total consulting fees is S50,000 for 1994/95 (West Valley portion is
$48,387)_ Since Sc:ott's worksheet is allocatingto District 3,he must use
$50,000 in the 1994/95 budget and NOT the $48,38T_
These 4 items directly affect the proposed.Campbell rates_
GREEN VALLEY DISPOSAL COMP
NY, INC.
LOS GATOS
94/95 8 95/98
RESIDENTIAL
CHARGE FOR EACH
ADD'L CAN
DISTANCE CHARGE
FROM
CURBSIDE
% increase
1 - 2
523.65
110.00% 6 - 30'
30%
2 - 3
23.65
31' - 130'
75%
3-4
23.65
6'-130'
n/a
'4-5
23.65I
>130'
219%
HRD-TO-SRV
57%
93/94
PROJ 2/95
2195 - 6/96
RATE
CENSUS
RAM
(RES4
RES-CURB
3/94
DESCRIPTION
OF CANS)
DISTANCE
CENSUS
FLATLAND
1
0' - 5'
2,595
56.65
5,117
521.50
2
2,523
13.30
1,765
45.15
3
1,682
19.95
32
68.80
4
83
26.60
0
92.45
5
32
33.25
116.10
1
6' - 311
140
7.98
266
27.95
2
126
15.96
78
58.70
3
72
23.94
4
89.44
4
6
31.92
0
120.19
5
4
39.90
150.930
1
31-130
168
9.31
297
37.63
2
129
18.62
65
79.01
3
58
27.93
2
120.40
4
7
37.24
0
161.79
5
2
46.55
203.18
1
> 130
2
12.64
4
68.59
2
2
25.27
4
144.03
3
4
37.91
0
219.47
4
50.54
0
294.92
5
63.18
370.38
SUBTOTAL
7.635
Z-!a4
HARD -TO -SERVE
1
0' - 5'
159
8.65
315
33.76
2
167
17.29
100
70.89
3
96
25.94
3
108.02
4
4
34.58
0
145.15
5
3
43.23
182.28
1
6 - 1301
2
I 10.37
2
43.88
2
20.75
I 5
92.15
3
5
31.12
0
140.42
4
41.50
0
188.89
5
51.87
236.98
1
31-130
9
12.10
14
59.07
2
6
24.21
8
124.05
3
7
36.31
0
189.03
4
1
48.41
0
254.01
5
60.52
318.98
1
> 130
1
16.43
0
107.68
2
3
32.85
0
228.12
3
49.28
0
344.57
4
65.70
0
483.02
5
82.13
581.48
SUBTOTAL
407.i
44Z
TOTAL RES
LIAO
$.01
12/30/94 Page 1
Working Draft
7
COMMERCIAL
3/94
2/95 - 6/96
CENSUS
1 RATE
CANS
1
39
$14.00
2
32
28.00
3
32
42.00
8
1
112.00
9
4
126.00
12
1
168.00
15
1
210.00
13
1
182.00
60
1
840.00
67
1
938.00
;BINS
PICKUPS
PER WEEK
1.3 YD
1
178
95.71
2
38
165.21
3
6
233.65
4
2
303.24
5
1
372.84
6
0
441.71
2 YD
1
114
135.31
2
38
268.13
3
15
430.13
4
4
500.66
5
0
617.24
6
0
914.58
3 YD
1
95
222.39
2
61
389.49
564.59-
3
45
4
16
776.85
5
6
914.78
6
9
1,129.36
6 YD
1
13
384.23
2
10
701.99
3
6
1,089.79
4
2
1,479.36
5
5
1,827.25
6
1
2,173.88
12/30/94 Page 1
December 30, 1994
DOB RATES
Dear Regina:
Our proposed DOB rates reflect a new policy of having the DOB customers pay for the weight of
debris. Accordingly, instead of being able to put unlimited tonnage (up to the street -legal weight)
in the boxes, customers will be charged for the tonnage after a tonnage allowance. Since disposal
fees are based on weight, this system provides equity. Volume based rates (the current system)
provides equity only when the density of material inside the box remains constant.
For an 18 cubic yard box, the customer will be charged $362.00. For that price, he/she can put
1.5 tons in the box at no additional charge. Any tons above that will be charged at $51.81 per
ton.
A 30 cubic yard box customer will be charged $510.00. For that price, he/she can put 4.5 tons in
the box at no additional charge. Any tons above that will be charged at $51.81 per ton.
A 40 cubic yard box customer will be charged $575.00. For that price, he/she can put 5.5 tons in
the box at no additional charge. Any tons above that will be charged at $51.81 per ton.
The 6 cubic yard box customer will be charged $395.00, which is higher than the 18 cubic yard
box. However, there is no per ton charge for the 6 cubic yard box. (The reason is that these 6
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 he/she can fit into the 6
cubic yard box. The price is set so that there is enough dollars to pay for the tipping fee on the
expected tonnages going in the 6 cubic yard box.
This methodology has been in place in another West Valley jurisdiction and in other Santa Clara
County cities.
SANNER, SCHWARZ 5. ASSOCIATES
RETAIL MANAGEMENT CONSULTANTS
December 24, 1994
TO: Patrick O'Laughlin, Mayor
Randy Attaway
Joanne Benjamin
Steve Blanton
Linda Lubeck
DEC 2 8 19cc,.i
292 MARCHMONT DRIVE - LOS GATOS, CALIFORNIA 93O32-S059
408 - 350-2600
SUBJECT: Green Valley Disposal Service and Fee.
Since the start of the partial recycling program, Green Valley has been run-
ning a truck through residential areas every week. Based on the area in which
I live, most homes place recycled items out for collection every two to four
weeks. Reducing the frequency of pick-up of some items should reduce the cost
and fee required.
Green Valley offers the use of a green 90 or 96 gallon trash container as an
option under the current rate system. However, there is a monthly rental
charge for this container. It seems that a similar brown container will be
used for yard waste under the new plan, which means that a rental charge for
this container as well as the other recycle bins will be a part of the fee.
Why not allow the customer to purchase the containers and avoid the monthly
rental fee. The rental fee system means that the customer pays for the con-
tainer many times over the life of the container.
Many years ago, IBM was forced by the courts to allow customers to purchase
their main frame computers. Prior to that decision they were available only
on a lease arrangement.
Why allow Green Valley disposal to implement and operate under a system that
was considered illegal for IBM?
I do not have an alternative to the system that allows a guaranteed percentage
of profit, but it is a very poor system and provides no incentive for Green
galley to reduce costs or fees. In fact it does just the opposite. It must
be controlled by strict and independent audit procedures.
Sincerely,
220 ATAC C409) 736-844? tdt'( P02 .TAN 03 '95 09:21
DATE: January 3, 1995
TO: Mayor and Town Council, Town of Los Gatos
FROM: Mike Abkin
RE: Recycling and Reduction of Waste
The solid waste management program under consideration tonight addresses
only one of the two principal ways its goal can be achieved, and, in the
long run, the less cost-effective one at that.
It is possible to structure the program to achieve both, with greater environmental and
economic benefit to the community. It would be a wonderful opportunity lost if the
proposed recycling program were not structured and broadened in scope to provide waste -
reduction incentives, as well. It would be worth postponing a decision (no more than
perhaps a few weeks) so such a restructuring could take place.
Consider the following:
1. There is no doubt that the goal of the program, to reduce requirements for landfills
as a place to dump solid wastes, is a wise one from both environmental and
economic points of view, even without the additional economic incentive imposed
by state -mandated penalties for not achieving target reductions in landfill use.
2. That goal, however, can be reached by accomplishing two objectives: (1) increase
the amount of waste recycled, and (2) reduce the amount of waste produced in the
first place. The proposed program, however, addresses only one of those two
objectives, recycling.
3. On the recycling side, it is correct that the entire community must share in the cost
in order to reap the benefit. Waste reduction, on the other hand, particularly when
it comes to household waste, is largely in the hands of individual consumer
households, and the government's role is to provide incentives. The proposed
program does not provide those incentives; indeed, one could argue that there are
disincentives to reduce waste.
4. As a concrete example, incentives in the form of a reduction in the recycling fee (the
rate paid to Green Valley) could be granted for homeowner (including apartment or
townhouse complexes) adoption of xeroscape landscaping practices. The Town
has already established a policy to promote such practices. Linking the two
programs will help achieve the objectives of both.
5. Green Valley's legitimate need for a stable, reliable revenue stream can be
accommodated by reviewing the program annually and, based on that review,
adjusting rates for homeowners to acknowledge measurable, observable, and
sustainable waste reduction achievements by households -- e.g., composting,
xeroscaping, etc. As time goes on, if the community as a whole produces less and
less waste that Green Valley would need to collect and recycle, rates can come
down for the community as a whole as well as for the successful individuals.
Asa final observation, if implementation of a policy on home auto repair merited a two -
month delay in order to find a solution that would be just and acceptable to the community,
a decision such as this one, which can have farther -reaching lifestyle implications and
greater costs to Los Gatos homeowners, merits equal or greater care in its design.
efi
30 December, 1994
TO : CITY COUNCIL MEMBERS
SUBJECT: ALTERNATE REFUSE COLLECTION RATE
1. MAKE YARD WASTE COLLECTION AN OPTIONAL ITEM.
(CONTINUE WITH THE TWICE A YEAR TRASH PICKUP)
2. DIVIDE THE TOWN OF LOS GATES INTO FOUR (4) AND
COLLECT GLASS AND METAL ONCE PER MONTH RATHER THAN
EVERY WEEK. THIS WILL REDUCE GREEN VALLEY'S WORK LOAD
AND THE CUSTOMER'S BILL ACCORDINGLY.
3. CONTINUE COLLECTING PAPER EACH WEEK DUE TO EXCESSIVE
ACCUMULATION.
THE ABOVE IDEA WOULD BE IDEAL FOR ME AND MANY OTHERS ,
AND I THINK IT IS WORTH CONSIDERING.
I SUBSCRIBE TO TWO CANS FOR WHICH I PAY $13.30
P ER MONTH.
IF' GREEN VALLEY WILL PICK UP ALL PAPER INCLUDING
JUNK MAIL , I WILL ONLY NEED ONE CAN.
IF GREEN VALLEY WILL PICK UP GLASS AND METAL ONCE
PER MONTH , I WOULD PROBABLY ACCUMULATE ONE
FOURTH CONTAINER OF EACH IN THAT PERIOD.
I THINK THESE IDEAS SHOULD BE CONSIDERED BEFORE PUTTING
THE RATES TO BED AND SEALED IN CONCRETE FOR THE NEXT 20
YEARS.' USING THIS THINKING NO ONE SUBSIDIZES MY REFUSE
COLLECTION AND LIKEWISE I DO NOT SUBSIDIZE ANY ONE ELSE'S
COLLECTION.
( WITH THE STROKE OF A KEY THE COMPUTER WILL BILL
ACCORDING TO SUBSCRIBED USE.)
��,,rr UP FLAG POLE AND SEE WHO SALUTES IT .
OE'VE L�LA
356-3060
tic.. r, r . ,
TELr9HCf4E
<408) 756-0903
HOLBROOK & LANKES
A"-ORNers AT LAW
CtvIC CLtvtr+ EH la 00.40
21 WI-S., At SAL $rrtEt I Surd 104
SAL0441.+. CAL4rOt1 A (11:701
January 3, 1995
Ms. Regina Falkner
Community Services Director
Town of Los Gatos
Post Office Box 949
Los Gatos, California 95031
Re: Green Valley Disposal
Dear Ms. Falkner:
TEL.ECOPIER
(406) 758-3538
Pursuant to your invitation to Gerard of December 30th (delivered
to me on January 3, 1995), 1 am here enclosing formal correspon-
dence to the council which we would ask be submitted to them. We
would also like to point out to you that while the attached is'
both factually and legally correct, the brevity of time allowed
for its issuance, has thereby necessitated its brevity. As a
consequence, it is not intended to be totally exhaustive of the
subjects covered.
We appreciate your affording us the opportunity to place this
position statement before the Council as part of their desk item.
Very truly yours,
HOLBROOK St LANKES
By
%A. LANXES
SAL:Cs
Enc.: Correspondence to Mayor and Council Members
T@ "d
A+c.chrY1 F,-t ;t
8£S£-9SZ tt '<d I.J 1 '3 H bS r• S T 3f11
TE .0PF-ONE
(4a9)758-0900
HOIBROOK & LAN KES
ATTORNEYS AT LAW
.".MC CEI.T=R E ADIAK.
21 W1.41' A1i4A1 8'QEET S J.nl 1C+
SAUNAS. CALIFORNIA 839,01
January 3, 1995
Mayor and Council Members
TOWN OF LOS GATOS
Post Office Box 949
Los Gatos, California 95031
Re_ Green Valley Disposal Company
TE LECOMER
{4O 758-3538
Dear Mayor and Council Members:
I have been forwarded Larry Anderson's December 30, 1994 memoran-
dum and requested to supply a response on the items raised for
clarity of Green Valley Disposal Company's (GVDC) position. I an
writing this correspondence for just that purpose.
PRAMCHISE HISTORY:
Pursuant to Chapter 11 of the Town Code, authorized by prior
Health and Safety Code 54250 (now Pubic Resources Code S49300),
the Township entered into the current franchise agreement with
GVDC in February 1983. While there is no Joint Powers Agreement
that was formally entered into between Saratoga, Monte Serene,
Campbell and Los Gatos to govern the activities of the contract's
Rate Review Committee (RRC), the history of the activities of the
RRC and the Township assist in determining the original intents
of the contracting parties (here Los Gatos and GVDC).
Despite assertions to the contrary, Los Gatos does NOT have the
right, power or authority to unilaterally modify either the
contract terms or the interpretation thereof established by a
historical course of conduct of the parties PRIOR to a dispute
arising between the parties. (California Civil Code 51636).
Attempts to do so are a clear violation of the contract and
further give rise to a claim of lack of due process under 42 USC
51983 (federal law).
RATE MIXING PROCESS:
A simple reading of the Franchise Agreement, without a review of
actual applicable history and law for definition, results in a
misunderstanding (whether intentional or otherwise) of the
authority of the jurisdictions and the legal limits placed
thereon.
0 ' d
02S£-0S2_ 7i Fetid 1 1 H SS: SI SG-2 —rar
Mayor and City Council Members
January 3, 1995
Page Two
In the instant case, rate adjustment review is triggered with the
performance audit and review of 1992-1993 and 1993-1994 rates.
All information lawfully requested has been supplied by GVDC with
alternatives for confirmation thereof having been proposed by
GVDC.
The RRC role is then to review proposed rate schedules and
projections for the future including (1) a realistic and impar-
tial review of the acceptability of expenditures, performance
incentives and sanctions, rate comparability and other informa-
tion as appropriate and (2) determine the profit level using the
operating ratio method to arrive at the contracted for profit.
while certain individuals interpret this charge so as to allow
unlimited decision power to determine which expenditures should
be allowed for profit calculation or even disallowed altogether
without factual or legal justification and to unilaterally
determine what profit (or loss) will be imposed under assertion
that public utility practice so allows, the courts have long ago
held public entities to the same standards as private parties for
contract interpretation.
INTENT OF TEE PARTIES:
while Mr. Anderson's memorandum contains a pleasant study of
histrionics as it deals with "Rate Making and Performance Audit
History," there seems to be a misuse and/or misunderstanding in
the reported rate yielded profits versus the ultimate profits
received by GVDC. It also appears that there is a failure to
understand even the rules for public utilities rate setting found
in feral aouer Commission v. Memphis Liaht, Gas and Water.
(1973) 411 US 458; Guaranty National znsura_lce So. et al. v.
gates. et al. (9th Cir. 199) 915 F.2d 508; P.P.C. v. Mope Natural
320 US 591, In re Persian Basin Area Rate Cases 390 US 747
for constitutional regulatory rate setting where there is to be a
just and reasonable balance of (1) the consumer interest in being
charged non -exploitative rates; and (2) the investor interest in
maintaining financial integrity and access to capital markets
including credit, attracting capital, service of debts, dividends
on the stock and recovery of all reasonable operating expenses.
The comparative market surveys (done by experts for both sides)
prove the rates sought by GVDC are NOT "exploitative" and there
can be no real question that unilateral cutting of legitimate
expenses and profits to less than the competitive market will
lessen (1) the availability of commercial credit, (2) the attrac-
tiveness of further capital investments and overall value of the
business interests. To assert otherwise is virtually ludicrous.
43 ' d
ElScSE—z3SL 3t :4t11 1 '3 H SS: S T :fll Sb—Sc
Mayor and City Council Members
January 3, 1995
Page Three
CQ t Base or P t:
Hilton, Farnkopf and Hobson (HFH) and apparently staff would have
this Council believe that the RRC, staff and this council can
simply either ignore an unquestioned, lawfully incurred cost or
simply refuse to allow profit under the guise of an issue of "the
acceptability of expenditures" or "the proper expenses to be used
in the calculation of a rate base..." The problem is that the
reality is that no one is asserting that any expenditure was
unnecessary, unrelated to the provision of required services or
incurred in the ordinary course of business. Instead, HFH says
simply ignore them or do not allow profit despite the true
history of the contract and the contract itself.
1) The contract itself reflects these
included (the contract asks for a "schedule
the Guadalupe Landfill" as well as a survey
other landfill facilities;
2) The overwhelming majority (10 out
companies use disposal costs in the profit
items were to be
of rates charged at
of tipping charges at
of 12) of HFH database
calculation; and
3) These charges have been included in calculations of the
past unless excluded by mutual agreement for a specified period.
Unilateral modification is "arbitrary rate regulation" by legal
definition vulnerable to the same litigation described below.
Here, the contract has been in place for over ten (10) years and
runs to the year 2003 as stated above. Historical records
(letters from jurisdiction representatives, etc.) reflect that
fiscal year 90-91 vas, by mutual agreement a "stand alone" year
and the parties returned to "normal" for fiscal year 91-92. The
fact that as part of a negotiated resolution, GVDC agreed to a
"pass -through„ of certain costs for a single "stand-alone" year,
does NOT change the intent of the parties from actions and
conduct after entering into the contract and PRIOR to the dispute
or disagreements as required by California civil Code 51636 and
ne Mountai 1ub nc. (1974) 39 C.A.3d
v es
18 at 26.
The legal reality is that the history PRIOR to the dispute re-
flects the intent of the parties here and is consistent with the
Franchise Agreement language and the standards of the industry
pursuant even to HFH research data supplied. Attempts to con-
clude to the contrary simply ignore the pertinent history, ignore
the contract language, ignore the required neutrality and the
objectivity and ultimately ignore the law.
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Mayor and City Council Members
January 3, 1995
Page Four
If the "cost" was in fact incurred and was "proper" for payment,
the contract calls for its inclusion in the cost base for profit
calculation. That includes landfill costs, franchise fees and
costs incurred (consultants) reasonably incurred by GVDC to
protect its lawful business interests.
D. Profit Margins - The Five e�rce t and Balancing Account:
Contrary to opposite assertion, the "5% guideline" has been
consistently applied since the inception of the contract.
Perhaps the real problem is the reporting by staff of raw profit -
loss numbers for 1986-1993 without acknowledging that all of
those numbers were subsequently adjusted by the use of the
"Balancing Account" to allow the agreed upon 5% profit.
1. History: The Arthur Young Performance Audit of GVDC -
Septexnber 1988 acknowledged:
"Information provided by the rate review committee
indicates the committee rate adjustrents...that
provided for a profit level IN ACCORDANCE WITH THE
FRANCHISE AGREEMENT...THE 5 PERCENT LEVEL."
Correspondence from the Town of Los Gatos of May 14, 1991 states:
" ..It was also agreed that GVDC would be allowed the
full five percent profit for FY 1989-1990"
A summary of the Balancing Account for 1986-1993 reflects the
consistency of the 5% profit calculations.
To assert there is the lack of a record as to the five percent
and at the same time admit "There is some discussion in various
reports and correspondence that Green Valley would be made whole
for years in which its revenues fell below projections so that
its net profits fell below 5%" makes no sense. The intent of the
parties is clear and even using "public utility practice," the
industry surveys (done by both sides) reflects the 5% to be well
within the industry standard.
C. Tax Calculation:
Contrary to certain implications, the owners of GVDC have offered
to disclose to disinterested third parties sufficient portions of
their private tax returns to confirm the actual imposed tax rate
that has already been verified by the CPA for GVDC.
0 "d
82S£-$SL U :-Sbi 1 '3 H LS = S T :f11 SG-: -1-.1t71r
Mayor and City Council Members
January 3, 1995
Page Five
Under public utility principles, the rate payers are compelled to
pay the actual tax expense incurred, not some artificial hypo-
thetical figure computed (as proposed by NTH and apparently
staff). It must be remembered that GVDC properly approached the
jurisdictions with the proposed change of a C Corporation to an S
Corporation which was lawfully approved. If the assertion is
that staff did not comprehend the nature of the change (or its
consequential result) then the position of the township must be
the prospective application of a C Corporation rate. To assert a
"lack of actual tax expense information" to avoid the consequence
of its own approval is both unwarranted and factually incorrect.
D. Consultant Expenses:
Whether as simply legitimate business expenses incurred by GVDC
to protect its business interests or as extraordinary expenses
incurred due to the nature of the complex rate review matters,
these costs are recoverable to GVDC both under the contract here
at issue as well as even "under usual public utility practice."
CONCLOBIgy:
As can be gleaned from the contract, the applicable history, the
consequential contract interpretation and the applicable law
(public utilities included) the reality is that we have a con-
tract, readily capable of interpretation that compels a specific
legal use and determination of a cost base, inclusive of all
legitimately incurred costs, the application of the five percent
profit guideline in conformance with the past understanding and
use of the parties and the consequentially required determination
of rates. Any other method involves contract breach, a failure
of due process and an uncompensated taking of a lawful business
interest.
SAL:cs
Very truly yours,
HOLBROOK & LANKES
STE' EN A. - KES
la ss-8sZ 1i Xt). 1 H ZS = s T Ant s6-E -t-1 1
Sheet1
_
Receommended Rate @ $ 9.40
Rate increase/decrease if assumption chanEd
Assumptions:
Profit on franchise fees
Yes
(0,45)
Profit on disposal base fees
Yes
1
Profit on disposal surcharges
No
Consultalt fees as operatiing expense
No
0.11
% After tax profit
5%
Tax rate
35%
Salary & fringe increase 580,000
No
0.06
BALANCING ACCOUNT
1994-95
823,383
(1.73)
PRIOR YEARS
413,537
(0.87)
INTEREST CHARGED BY GRE
72.207
(0.15)
1,309,127
(2.75)
Disposal costs & tons
42.96
1.63
Total revenue requirement
$ 13,273,432
Number of ants in Las Gatos
10,300
Los Gatos Revenue
S 1.161,840
% of total revenue
8.75%
Page 1