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Item 19 Staff Report Approval of Green Valley Disposal Company Franchise Agreement; Guadalupe Rubbish Disposal Co. Landfill Agreement; and Setting of New Collection RatesTOWN OF LOS GATOS Council Agenda Report DATE: February 16, 1983 TO: MAYOR AND TOWN COUNCIL FROM: TOWN MANAGER i)Y_. SUBJECT: APPROVAL OF GREEN VALLEY DISPOSAL COMPANY FRANCHISE AGREEMENT; GUADALUPE RUBBISH DISPOSAL CO. LANDFILL AGREEMENT; AND SETTING OF NEW COLLECTION RATES COUNCIL AGENDA Date: 2/22/83 Item No. /9 RECOMMENDATION: That Council close the public hearing and take the following actions: 1. Adopt the attached resolution authorizing the Mayor to execute the fran- chise agreement with Green Valley Disposal Company; 2. Adopt the attached resolution authorizing the Mayor to execute the Guadalupe Rubbish Disposal Co. Landfill Agreement; and 3. Adopt one of three attached resolutions setting collection rates, depending on the collection option selected by the Council. It would be staff's recommendation that Council select the variable can rate option. DISCUSSION: Staff prepared a memorandum dated February 10, 1983, detailing the major issues involved in considering the franchise and landfill agreements, and rate struc- tures, for Council's discussion at their work session of February 14, 1983. This report is attached for your further reference. Council is being asked to make several decisions at the end of the Public Hearing: PREPARED BY: NADINE P. LEVIN, Assistant Town Manager -- Reviewer' by: Attorney Clerk Treasurer TCWN COUNCIL ACTION DIRECTED -M0' ACCION OF r.OUNCIL: COMMENTS: GREEN VALLEY FRANCHISE -- 2 February 16, 1983 o Whether to accept the franchise and landfill agreements; o Whether to pursue a curbside recycling program at this time and under what delivery alternatives; and o to select one of three collection options and adopt the correspond- ing rates. Franchise Agreement It is staff's contention that the agreement has been negotiated and drafted in a manner to provide the Town with a level of franchise services that meet the needs of the residents today and flexibility for the future. There are new concepts within the franchise agreements that address an effort to price collection services based on the cost to provide such services. The new concepts are residential services based on terrain; flatland and hard -to - serve areas; and pickup location. The 'hard -to -serve' area is defined in the agreement as an area of one or more residences that, by the nature of its access road or the low density of indi- vidual residences, requires significant additional time or effort, or use of special equipment to pick up solid waste matter. Council was provided a list, by address and street, of the hard -to -serve areas in the Town, at their meeting of February 14, 1983. Landfill Agreement Staff views the landfill agreement as a provision of landfill space to the Town for the next twenty (20) years. Additionally, the agreement provides the Town with input relative to any future resource recovery operations at the land- fill involving waste collected by Green Valley in the Town. Recycling Program The franchise agreement requires Green Valley to provide a proposal for a recycling program; and also reserves to the Town the right to reject such a proposal and provide the service on its own or through a third party. The decision re a recycling program has no specified time frame in the agreement; thus, if Council decided not to pursue a program now, there is nothing in the franchise agreement to prevent such a decision in the future. If Council wants to pursue a recycling program, staff believes that the costs associated with start-up and first year of operation would need to be subsi- dized by the Town. Subsequent years of operation could be subsidized by the rate -payers through a surcharge applied to all Town residents receiving col- lection service from Green Valley. The magnitude of the subsidy needed by the Town during the first year depends heavily on customer participation and the market price of recyclable materials at any given time. Based upon the financial projections presented in the staff report dated February 10, 1983 (Ehxibit C), the first -year subsidy for a Town -operated program would be approximately $57,000. GREEN VALLEY FRANCHISE -- 3 February 16, 1983 Council should consider the desire to pursue a recycling program before decid- ing on a rate structure option. The selection of an unlimited collection option appears to run contrary to a successful recycling program, according to experts in the recycling field. Colection Options and Corresponding Rates The franchise agreement provides Council with three collection options: Variable Can Rate with Hard -to -Serve Areas: based upon number of cans and pickup location, coupled with a hard -to -serve area rate (this option would maintain the semiannual pickup service); ° Unlimited Collection Rate with Hard -to -Serve Area: the franchise agree- ment does not provide for unlimited service in the hard -to -serve area; thus, the hard -to -serve area would be on a variable can rate basis. The semiannual pickup service would not be continued under this option. ° Unlimited Collection Rate with One -Can Service and Hard -to -Serve Area Rate: This option would accommodate the current one -can user who does not have the need to pay a higher rate for an unlimited service. The semiannual pickup service would not be continued under this option. Thus, the one -can subscriber would need to make other arrangements if they desired to dispose of larger quantities of garbage on a semiannual basis. There are several factors that can help shape the decision on a collection option: a. Pursuit of a recycling program; and b. Current distribution of can use by customer. The issue relative to the relevance between collection option and recycling is addressed in the preceding section on recycling. The current distribution data provided by Green Valley Disposal Company indicates that 34% of the total Town customers are currently one -can users and 48%, two -can users. Thus, 82% of the total customers use two or less cans on a regular basis. Given the rates pro- posed by collectionoption, the variable can rate would provide the less expensive service to the majority of the users -- assuming a desire on their part to main- tain their current usage pattern. Council may want to also consider that a variable can rate provides a greater incentive to conserve. Staff would recommend that Council select the variable can rate option; and reexamine that selection during the next rate review period. Rates for commercial services are recommended at an average increase of 12.5%. Staff is recommending that the drop-off boxes rate receives no increase, due to a substantial increase put into effect by Green Valley in July 1982, when the drop-off boxes were not regulated by the Town. Council may take the appropriate actions by adopting the attached resolutions. GREEN VALLEY FRANCHISE -- 4 February 16, 1983 The Town Attorney will also be requesting that Council introduce ordinance amendments to Chapter 14 of the Town Code to bring the ordinance into con- formance with the agreement. NPL/DRM/ss Encls. cc: Regular Distribution Green Valley Disposal Co. Town Manager February 10, 1983 TO: THE HONORABLE MAYOR AND COUNCIL TOWN OF LOS GATOS, CALIFORNIA FROM: NADINE P. LEVIN ACTING TOWN MANAGER SUBJECT: GREEN VALLEY DISPOSAL CO. FRANCHISE AGREEMENT This memorandum will cover several areas relative to the Green Valley Disposal Co. Franchise Agreement that Council will discuss at their work session of February 14, 1983, and during the Council meeting of February 22, 1983. The following issues are addressed: 1. Chronology of events leading up to the proposed Franchise Agreement; 2. Contents of the proposed Master Franchise Agreement (Exhibit A); 3. Contents of the proposed Landfill Agreement with Guadalupe Disposal Co. (Exhibit B); 4. Suggested changes in the Town Code, Chapter 14; 5. Rate Structure Options; 6. Curbside Recycling. BACKGROUND: The current Franchise Agreement between the Town and Green Valley Disposal Co. was entered into in 1972 and effectively ended December 31, 1982, but was extended until March 31, 1983. Several years ago, the cities served by Green Valley (Monte Sereno, Campbell, and Saratoga) decided that a more uniform approach to negotiating with the Company would be beneficial in the franchise renewal process. To that end, Town staff has been working with staff from Monte Sereno, Campbell, and Saratoga since May 1982 to arrive at negotiating parameters; to collectively negotiate with Green Valley; review Green Valley's budget and financial infor- mation; and develop a rate structure. Prior to beginning negotiations, Town staff requested input from the Town Council as to concerns to be addressed during negotiations. The concerns expressed were as follows: 1. A rate structure proposal based on an unlimited collection option; 2. Curbside recycling option; 3. Rates based on a zone or terrain basis; . 4. Not subsidizing unincorporated mountain areas through Town residential collection rates. GREEN VALLEY FRANCHISE AGREEMENT -- 2 February 10, 1983 Staff believes all these issues are addressed in the proposed franchise agreement. In addition, the negotiating team felt a need during negotiations to: guarantee the availability of Guadalupe Landfill for disposal of refuse for the next twenty (20) years; push ahead on operational efficiency recommenda- tions contained in the Ralph Andersen & Associates Report on Refuse and Rate Structure (August 1980); and provide for five-year performance reviews by which the continuation of the Franchise Agreement would be based. The negotiating team reached conceptual approval with Green Valley Disposal Company and Guadalupe Rubbish Disposal Co. on the Franchise Agreement and Landfill Agreement, respectively, in early September 1982. Town staff brought the agreement (in the form of a Position Paper) to Council on September 7, 1982, for conceptual approval. Council granted conceptual approval to the document and, at staff's request, withheld final action until the documents could be drafted into contractual form and until staff could review Green Valley's finance and budget information and arrive at recommended rate structure(s). The two documents were drafted into contractual form by Mr. Frank Gillio, City Attorney for Monte Sereno, in an effort to arrive at commonality among all four jurisdictions. Staff has forwarded the documents to Mr. Hays for review and comment relative to any legal concerns the Town may have with them. The Franchise Agreement is attached to this memo as Exhibit A and the Landfill Agreement, as Exhibit B. The following will provide a brief overview of the salient features of the agreements: FRANCHISE AGREEMENT WITH GREEN VALLEY DISPOSAL CO. o Term - 20 years/at 5-year intervals a performance audit is to be con- ducted by third -party selected by the Town, and paid for by Company. Franchise will be extended for next five-year period only if audit shows performance to satisfaction of the cities. o Franchise Fee - 10% of gross revenue, with provision for late payment fees. o Franchise Services: Provide collection services to Town property without charge. This is a continuation of current practice. Provide curbside recycling upon request of the Town; Town also reserves the right to perform such function, or to con- tract with another entity for such service. Company will receive calls 24 hours a day re missed collec- tions and will remove materials within 24 hours of demand. Company will mail a public information brochure by July 1, 1983 to all customers desiring available services, complaint pro- cedures, rates, etc. GREEN VALLEY FRANCHISE AGREEMENT - 3 February 10, 1983 Company to respond to Town request to provide additional new services by furnishing cost information and the Council shall establish a rate for such new service. Rates and cost for service information will be provided in the following categories: ° Residential Service: a. Level terrain: curbside collection; frontyard pickup; backyard pickup and per 100 ft. beyond backyard; b. Hard -to -Serve Areas: Company to provide list of hard - to -serve areas with a map within the context of the definition provided in the agreement (p. 14); c. Non-residential areas. ° No profit guaranteed to Company, only a reference to using an operating ratio with a five (5%) percent after tax as a guideline. FINANCIAL INFORMATION: ° Company to submit an annual financial report to Town. BAD DEBT/TERMINATION OF SERVICE: 0 Company may terminate . service to residential customers who are 120 days in arrears in payment and non-residential customers who are sixty (60) days in arrears. Company must first notify the customer; Town; and monitor the property and notify the Town of any accumula- tion of garbage on the property. ° Company must restore service once the charges owed have been paid. The Town also reserves the right to withdraw privilege of termination for nonpayment with 30-day notice to the Company. This provision was very important to Green Valley, and staff believes it is fair and provides the Town with proper protection. . LANDFILL AGREEMENT WITH GUADALUPE RUBBISH DISPOSAL COMPANY: Guadalupe Rubbish Disposal Company, Inc. is a corporation separate from Green Valley Disposal Company; however, they share the same Board of Directors. Given the separation of the companies, it was necessary to enter into the Land- fill Agreement separate from Green Valley Disposal Co. It is also important to note that the Board of Guadalupe Co. points emphatically to their independence from Town regulation and are reluctant to enter any agreement that would suggest any rate regulation and access to any financial information that should not be of concern to the Town. Staff viewed the Landfill Agreement as important for two GREEN VALLEY FRANCHISE AGREEMENT -- 4 February 10, 1983 reasons: an assurance that if Green Valley ceased to exist, or if the Town discontinues the collection franchise due to poor performance, the Landfill commitment remains; input into any resource recovery operation at the Landfill. o Term - 20 years. o Resource Recovery - with the exception of methane gas recovery cur- tently ongoing at the disposal site and minor material salvage, the Company will not undertake any resource recovery operation without notifying the Town and giving the Town the right to comment and/or participate. • Company will pay five (5%) percent after tax net proceeds derived from any resource recovery operation with Green Valley Disposal Co. using the materials collected from the Town. These revenues shall be used to subsidize the rates paid by customers to Green Valley for collection services. o If the Town provides financial or other tangible support to a resource recovery operation, the Company agrees that a new profit- sharing arrangement will be materialized. • Tipping (Dumping) Fees - Tipping fee charged by Guadalupe to Green Valley for solid waste collected from the Town shall not exceed an amount per ton equal to fifteen (15%) percent above the average fee charged at disposal sites selected by both the Company and cities that are located in Santa Clara, San Mateo, and Alameda Counties. o Landfill Commitment - - In the event of the sale of the landfill, the new owner will be subject to the terms of the agreement. TOWN CODE, CHAPTER 14: Chapter 14 of the Town Code, Garbage, Refuse, and Weeds, references the Town's rules and regulations relative to the collection and disposal of solid waste in the Town. Staff has referred several recommended changes to Mr. Hays for review, to bring the Code into conformance with the proposed agreement, and also to address the Solid Wastes Management Plan being drafted by the Department of Public Works. Mr. Hays will present these changes during the Council meeting of February 22, 1983. RATE STRUCTURE: In the past, staff has made a recommendation to Council for a residential variable can rate based solely on number of cans collected. Under the context of the new agreement, the rate structure is much more complicated, due to terrain concepts and collection options to be selected by the Council. In addition, it is important to note that the rates will no longer be uniform for all four GREEN VALLEY FRANCHISE AGREEMENT -- 5 February 10, 1983 jurisdictions served by Green Valley. In an effort to more accurately reflect cost -to -serve information by jurisdiction and to avoid subsidies by ratepayers of one jurisdiction, and to reflect local collection options, a rate structure will be unique to each of the cities. 0 Town Council has three collection options to select from: (1) Variable Can Rate: based upon number of cans and pickup location, coupled with a hard -to -serve area rate; (2) Unlimited Collection Rate, with a hard -to -serve area rate. Please note that the franchise agreement does not provide for unlimited service in the hard -to -serve area; Green Valley will not provide that service, and it appears justified, given the necessity to use smaller collection trucks with limited capacity. (3) Unlimited Collection Rate W/One Can Service, and a hard -to -serve area rate. This option is proposed in an effort to accommodate the current one -can user who has no need to pay a higher rate for an unlimited service. Options (2) and (3) would not include the continuation of the current semi-annual pickup. Council needs to select one of the three options and adopt the corres- ponding rate schedule at their meeting of February 22, 1983. The rate -setting process was a protracted one that began with the negotiating teams' review of Green Valley's budget and cost -to -serve information. It is important to note that this was the Company's first attempt at a formalized budget setting process, and capturing cost -to -serve information. The nego- tiating team reviewed the expenditure plan with an eye to the prior years' actual expenditures and what seemed reasonable. Some expenses were disallowed, principally in the following areas: - Management compensation levels; - Buy-out of original owners; - Bad debt; - Guaranteed profit. Even in disallowing certain expenditures, the expenditure plan has increased substantially over the prior year by thirty (30%) percent (1981-82), prin- cipally due to dump fees charged Green Valley by Guadalupe Rubbish Disposal Co. This increase resulted from a business decision of Guadalupe Co. to no longer subsidize Green Valley and to pass the true dumping cost on to the Company. Green Valley has accepted the team's actions, but has some reservations relative to the cuts. Based upon what the Committee considered an acceptable expenditure plan, revenue requirements were calculated for each jurisdiction, based on the Company's cost- GREEN VALLEY FRANCHISE AGREEMENT -- 6 February 10, 1983 to -serve information. Each city's staff representative then calculated rates for each of the three collection options, based upon the current customer distribution information provided by the Company. The rates prepared for Council's review by option reflect as closely as possible cost -to -serve information as currently available for the Company; and do meet the revenue requirements to support Green Valley's budget. How- ever, given that new service options are being proposed, there cannot be any guarantee that customer selection will mirror the assumptions made and that revenues produced will be as projected. Green Valley has some concern in this area; however, other than returning to a set variable rate based solely upon the number of cans, there is no way to make a guarantee to Green Valley. The remedy that is available to Green Valley is the franchise agreement pro- vision providing for interim rate reviews, if conditions warrant. It is also possible that customer service selection may emerge in a pattern that will cost Green Valley less than they assumed in their expenditure plans and their costs will be less. In reviewing the proposed rates, Council will note that under the variable rate option, the majority of the customers either receive no increase or a very minimum increase over current rates. However, the increase is reflected in the rates for backyard pickup and hard -to -serve areas. Staff believes this is logical in that these two cases (due to can location and terrain) are more costly from which to collect. Council should note that the ability to substantially hold the line on the rates in Los Gatos is due to the continuation of an industry practice of residential subsidy by commercial rates. In the past, this subsidy has been spread to all fou cities. The proposed rate structures reflect keeping the commercial subsidy within Los Gatos to benefit the Town's ratepayers. Given the concentration of commercial ratepayers in Campbell and Los Gatos as opposed to Monte Sereno and Saratoga, the proposed rates in Campbell and Los Gatos are considerably less than those proposed for the latter two jurisdic- tions. COMMERCIAL RATES: Green Valley had requested an eighteen (18%) percent increase in commercial rate collection, and the negotiating team is recommending an average of a thirteen (13%) percent increase. These rates will be uniform in all four communities. DROP-OFF BOXES: In the past, the Town did not control the rates on drop-off boxes. The proposed franchise agreement brings them under the Town's rate -setting power. Staff is recommending no increase in drop-off box rates, in that na increase was put into effect by Green Valley in July 1982. It is proposed that all rate adjustments go into effect as of March 1, 1983. GREEN VALLEY FRANCHISE AGREEMENT -- 7 February 10, 1983 CURBSIDE RECYCLING: Green Valley was requested to submit a proposal to provide curbside recycling. They submitted two proposals: one assuming all four cities' participation, and the second assuming Los Gatos participation solely. At this time, only the Los Gatos Town Council has expressed interest in considering the option further. Green Valley proposes their participation in both the collection and processing operations. However, among the issues Council may want to consider are three options for the provision of recycling in Los Gatos: o Green Valley both collects and processes at the Guadalupe Landfill site; o Green Valley collects and delivers to Town Recycling Center for processing by the Town; o Town both collects for recycling and processes at Recycling Center. In considering if, and, or how to provide curbside recycling in the Town, staff believes the following concerns must be addressed: start-up costs; revenue and expenditure data during first and subsequent years of operation; assumption of customer participation and how any deficit will be paid for (either direct subsidy from Town General Fund, or surcharge to ratepayers); and the effect of selecting an unlimited can rate structure on recycling participation. Exhibit C provides data and a discussion on the preceding issues. FURTHER CONSIDERATIONS: Council is reminded that a Public Hearing on the Master Franchise Agreement and rate structure will be held during the February 22, 1983 meeting. Additionally, it is possible that refuse drivers employed by Green Valley may appear before the Council at either the work session or the Council meeting. Green Valley recently concluded labor negotiations with the drivers, and the drivers are of the opinion that the monetary result of their negotia- tions was unsatisfactory, due to the Company's expenditure plan dictated by the cities. Staff has asserted, and continues to assert that labor negotiations between Green Valley and their employees are an internal concern of the Company and the Town has no involvement in the matter. NPL/ss Encls. EXHIBIT "C" CURBSIDE RECYCLING I. FINANCIAL PROJECTIONS Income and expenditure projections depend heavily on the assumptions made relative to customer participation and the market price of recyclable materials at a given time. The two succeeding pro formas depict entirely different pic- tures, based on the assumptions made and other factors such as overhead costs of a private firm vs. public entity. Green Valley Proposal Type of service: curbside collection once every two weeks, with customers separating the recyclable materials by type and using burlap bags provided by the Company. Processing at the Guadalupe Landfill. (They are assuming a 40$ participation rate.) 1st Year of Operation Income: $32,016 Based on market information available as of December 1982. Expenses: $93,998 Inclusive of labor and equipment costs capitalized over a five-year period; public relations costs and Company overhead and profit. Profit/(Deficit): ($61,982.00) 2nd Year of Operation Income: $32,016 Based on market information avail- able as of December 1982. Expenses: Profit/(Deficit): $88,827 (53,271) Green Valley has indicated in their proposal that the cost would decline with participation of the other West Valley cities. Town Collects and Process Proposal The data for this pro forma is extracted from a study done by Scott Wilson while an intern with the Town earlier this past year. Type of Service - curbside collection once every two weeks; with customers separating the recyclable materials by type and using burlap bags provided by the Town. Processing would be at the Town's Recycling Center. A 40% partici- pation rate is assumed: 1st Year of Operation Income: $30,260.00* Based on market data available in December 1982. Expenses: $53,413.00 Assumes the addition of one new full-time employee; borrowing of some equipment from the Corporation Yard; one-time site improvement at the Recycling Center; and capitaliz- ing the cost of new equipment over various life cycles. Price/(Deficit): 2nd Year of Operation Income: Based on market data available in December 1982. Expenses: ($23,153) $30,260* $37,743 Profit/(Deficit): ($ 7,383) Council should note that it has not been Town practice to represent cost of new equipment on a capitalized basis, but to purchase it outright. If the Town followed prior practice, the necessary capital funds in the first year of operation would be $40,285; this figure would be substituted for the $5,880 included in the first year cost for capitalized equipment. From these two pro formas presented, it appears that if the assumptions are correct as to what it takes to operate a curbside recycling program, the Town is less expensive than Green Valley. However, in both cases, a deficit is projected. Council would need to consider how much a deficit, if it materialized, could be handled; either through a sub- sidy from the General Fund, or a surcharge to all rate payers. -2- II. EFFECT OF AN UNLIMITED CAN RATE STRUCTURE ON CURBSIDE RECYCLING Experts in the recycling field argue that the existence of a collection rate based upon an unlimited structure is detrimental to the participation in a recycling program. They assert that the incentive to take the time and energy to separate for recycling is lost when a customer can put an unlimited amount of materials out for collection under one rate. If Council wants to pursue a curbside recycling program, they may want to consider whether or not an unlimited rate structure is contrary to a successful program. III. OTHER CONSIDERATIONS o Effect of a curbside recycling program on the efforts of nonprofit groups that operate newspaper drives. Some communities have chosen to compensate certain recognized groups for the loss in revenue. This action obviously must be considered a part of the operating cost of a curbside recycling program. • Benefits of a recycling program beyond the financial break-even concerns: a recycling program may extend the life of the landfill, save on energy, and conserve resources. o Physical capacity of the Town recycling center to handle the volume operated by a 40% participation rate. Staff is unable to answer the question now. But it must be a concern, as the Town decides on how to operate such a program. It is staff's recommendation that Council give direction as to their desire to pursue a curbside recycling program and under what alternatives. Staff will then come back to Council with refined financial projections and alternatives for financing any potential deficit. Staff feels this figure is conservative, given the current market rate for the aggressive marketing of newspaper. -3-