Budget Action Yes: No: X Finance Review: ITEM TYPE: CONSENT PUBLIC HEARING EXISTING BUSINESS NEW BUSINESS_ X

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1 CITY COUNCIL AGENDA REPORT SUBJECT: Consideration of Actions Relative to Automatic Extension of the Franchise Agreement with the South San Francisco Scavenger Company EXHIBIT: 1) December 18, 2007 Staff Report 2) November 24, 2009 Staff Report Approving Franchise Agreement 3) 2015 Rate Survey Report No. CITY OF MILLBRAE 621 Magnolia Avenue Millbrae, CA For Agenda of: June 13, 2017 Department: Public Works, City Attorney Originator: Cyrus Kianpour, City Attorney Approved: 5964 Budget Action Yes: No: X Finance Review: REPORT TYPE: ACTION X INFORMATIONAL ITEM TYPE: CONSENT PUBLIC HEARING EXISTING BUSINESS NEW BUSINESS_ X RECOMMENDATION: Staff recommends that the City Council consider providing direction to staff regarding the automatic eight-year extension of the Franchise Agreement (Agreement) with the South San Francisco Scavenger Company ("Scavenger Company"). BACKGROUND: There is a fifty seven year history to the franchise contractual relationship between the City and the Scavenger Company. We try to capture the highlights below. In 2008, staff provided options for the City Council to consider for the upcoming expiration of the Agreement in 2009 with the Scavenger Company. The options included 1) Developing a Request for Proposal (RFP), bidding the City s garbage services, and developing a new Agreement with the chosen company; 2) Negotiating a new Agreement with the Scavenger Company; or 3) Temporarily extending the current Agreement. The City Council determined it was too expensive to go out to bid, given that additional costs would be incurred with consultant fees to develop an RFP, as well as attorney fees, which together were estimated to cost $130,000 excluding City staff time. There were also concerns regarding a lengthy RFP process, disruption of service, and the potential negative effect on the high diversion rate. Since temporarily extending the then current Agreement would have only delayed the inevitable expiration of the Agreement, that option was not pursued. In the end, staff was directed to proceed with negotiating a new Agreement with the Scavenger Company. In so doing, the City Council directed staff not to utilize a cost-based rate setting methodology because of the cost of the required audit process to implement this approach, which costs are borne by the City and the ratepayers, and the need to perform an audit every two years which adds to the expense. The City had abandoned the cost-based approach 3 years before pursuant Page 1 of

2 to a Fourth Amendment to the then Agreement with the Scavenger Company and was establishing rates at that time based on the calculation of the average rates of other cities in San Mateo County, making adjustments for differences in service levels. The first attachment is a staff report to the City Council for the 12/18/07 Council meeting, which explains the history and application of that rate setting process. In deciding to negotiate a new Agreement with the Scavenger Company in 2008, the City Council also recognized that the Scavenger Company had a good track record and was a leader in the industry by implementing innovative programs, in addition to helping the City reach the mandated diversion rates. To pursue negotiations with the Scavenger Company, a City Council sub-committee was formed, which in addition to two Council members, included the Public Works Director. In November 2009 after much consideration, the City Council approved a new Agreement with the Scavenger Company. For further background on the history of these negotiations we have attached the 11/24/09 staff report pursuant to which the City Council approved the existing Agreement. The Agreement has an initial eight-year term, which is scheduled to expire on November 1, The Agreement includes two eight-year extensions, which automatically go into effect unless either party provides the other party with notice of its intent to terminate at least 60 days prior to the end of the term (i.e., by August 31, 2017 for the current term). The most important term of the Agreement involves the process by which rates are set. The rate-setting section of the Agreement establishes a three year cycle of potential rate adjustments. During the first two years of the term, the maximum allowable garbage rates can be changed based upon 80% of any changes in the Consumer Price Index (CPI). Every third year, any potential changes in rates are based upon a rate survey, conducted by the Scavenger Company, and the recalculation of service rates to equal 95% of the average of the rates charged in a preselected group of cities. This rate adjustment methodology is utilized by two other jurisdictions the Scavenger Company serves, including Brisbane and South San Francisco. Other cities in San Mateo County utilize different rate setting methodologies. The South Bay Waste Management Authority, which now is called RethinkWaste, is a joint powers authority made up of twelve entities: Atherton, Belmont, Burlingame, East Palo Alto, Foster City, Hillsborough, Menlo Park, Redwood City, San Carlos, San Mateo, the County of San Mateo and the West Bay Sanitary District. RethinkWaste owns and manages the Shoreway Environmental Center which receives all of the recyclables, organics, and garbage collected in the service area of this joint powers agency. Recology San Mateo County provides the recycle, compost and garbage collection services for the member agencies. Staff will research the rate setting methodologies used by RethinkWaste and its member agencies and will be prepared to discuss this information with the Council at the meeting. The Millbrae rates effective in July of 2016 and 2017 were adjusted according to changes to the CPI for Urban Wage Earners and Clerical Workers, as published and maintained by the United States Bureau of Labor Statistics for the San Francisco-Oakland-San José Metropolitan Area for the current year. Pursuant to this formula, the rate increase effective on July 1, 2017, was 2.62%. The Council approved those rates on May 23, 2017, pursuant to Resolution No Next year the rates would be adjusted according to the rate survey. The Agreement envisions that at least every 7 years the City and the Company will conduct a review of the cities on the Page 2 of

3 list to ensure that the services and rate structures in the specified cities are comparable to Millbrae's franchise. Such a review would take place before the next survey should the Agreement continue. Staff has also attached as an exhibit the current list of cities and the rate information which governed the last survey and rate setting process in You will see that this list includes 7 cities from San Mateo County together with others throughout the Bay Area. With reference to the current agreement and the rate setting process, a few residents have voiced complaints, claiming that the rate-setting methodology is flawed and unfair to the ratepayers and asking the City to engage in a competitive bidding process and return to a cost-based formula for rate setting. With the market survey method, Millbrae's rates (without inclusion of the franchise fee) are below the average of the rates of all the listed cities and fall near the median. It is noteworthy that the City only receives a few complaints a year about the Scavenger Company's service. If the Council is satisfied with the services that the Scavenger Company has provided over the past seven and a half years and with the rate methodology in the Agreement, it can take no action and allow the Agreement to automatically extend for another eight years. Alternatively, the City Council could request that staff (1) provide additional information regarding the Agreement, its rate methodology or other issues; (2) engage in negotiations with Scavenger regarding potential changes to the Agreement; or (3) initiate a process to obtain competitive proposals for a new Agreement for these services. Depending upon which course it chooses, the City may need to engage a consultant to provide additional resources and expertise regarding the very complex issues involved in solid waste rate-setting and franchise negotiations and to facilitate, if desired, a solicitation process. If necessary, a short-term extension could likely be negotiated with the Scavenger Company to provide service while a new arrangement is considered. FISCAL IMPACT: The Agreement provides for the payment of a franchise fee to the City in the amount of 10% of the revenues from Millbrae customers collected by the Scavenger Company. These revenues go into the General Fund. The amount of the franchise fee the City receives increases as garbage rates increase. With the recent rate adjustment, the City will receive approximately $550,000 annually. The City also receives 5% revenue from the Scavenger Company s sales of collected recyclables which results in approximately $25,000 for the year. Finally, the City receives from the Scavenger Company an additional 5% of revenues collected from the customers to cover source reduction, recycling and household hazardous waste programs and staffing, which equals $260,000 annually. The Scavenger Company is allowed to pass this fee onto the customers. Any successor agreement would likely contain similar terms. COUNCIL ACTION: Provide direction to staff regarding the automatic eight-year extension of the Franchise Agreement with the South San Francisco Scavenger Company. Page 3 of

4 Exhibit 1 CITY COUNCIL REPORT AGENDA REPORT CITY OF MILLBRAE 621 Magnolia Avenue Millbrae, CA SUBJECT: Public Hearing to Adopt a Revised Garbage Rate Schedule for CY 2008 EXHIBITS: (1) October 2007 Rate Survey and Adjusted Rate Calculation (2) Resolution and Proposed Revised Rate Schedule for CY 2008 (3) Sample of Notice Compliant with Proposition 218 Report No. For Agenda of: December 18, 2007 Department: Public Works Originator: Ron Popp Approved: Budget Action? Yes No General Services Review: Point of contact is Ronnald Popp at (650) REPORT TYPE: ACTION INFORMATION ITEM TYPE: CONSENT PUBLIC HEARING OLD BUSINESS NEW BUSINESS RECOMMENDED ACTION: That Council conduct a public hearing and adopt a revised garbage rate schedule for calendar year SUMMARY: As required by the City s Agreement with its garbage franchiser, the South San Francisco Scavenger Company, the City has performed the required annual survey of rates of cities in San Mateo County. Based upon the Agreement and this survey, staff is recommending an increase in garbage rates. If approved by Council, rates would increase as follows: (1) residential rates by 3.3%; (2) commercial toter rates by 2.7%; (3) commercial bin rates by 2.5%; (4) compactor cubic yard rate by 5.9%; and (5) debris box rates by 6.1%. BACKGROUND/ANALYSIS: Council approved a fourth amendment to Franchise Agreement with the Scavenger Company in February 2005 which changed the rate setting methodology from cost plus process to annually setting rates equal to the average of the rates of other cities in San Mateo County. The new rate setting methodology also included some adjustments for differences in service levels. In December 2005, Council approved a fifth amendment to the Franchise Agreement to clarify how rates are to be adjusted based upon the survey averages in order to make the calculations consistent with previous Council policies such as implementing a uniform rate structure and how rate percentage increases have been applied in previous years. As a result of the change in rate setting methodology, 2005 toter rates for residential and commercial toters were reduced by 13.6% and 14.8% respectively. Rates for commercial yard bins, compactors, and debris boxes were increased by 7.8%, 16.8% and 6.4% respectively. Had the cost plus rate setting methodology remained in place, staff expected to recommend to Council that rates be increased across the board by 8%. However, at the time in late 2004, this 8% increase was disputed by the Company. At the conclusion of the rate review conducted during the summer of 2004, the Company was requesting a 25% increase in rates across the board. Since setting rates based upon the revised rate setting methodology (market survey method) for CY 2005, Page 1 of 2

5 Exhibit 1 Council has approved two additional set of increases which were applied for CY 2006 and CY The October 2007 surveyed rates, adjustments and the proposed increases are provided in Exhibit 1. Since implementing the revised rate setting methodology, rates have increased an average of 2.95% per year compared to the annual increases under the previous cost plus contract s rate setting methodology which averaged 7.6% per year. Additionally, the expensive and time consuming bi-annual rate reviews, including legal counseling of the reviews, were eliminated. The combined Company and City costs for the last rate review conducted in 2004 was well over $100,000. The average rates of cities in the County as surveyed by staff this year and adjusted per the Agreement would increase CY 2008 monthly: (1) 32 gallon residential toter rates from $20.97 to $21.65 or $.68 per month; (2) 32 gallon commercial toter rates from $21.98 to $22.57 or $.59 per month; (3) 2 yard bin container rate from $ to $ or $5.30 per month; (4) compactor rates from $52.68 per yard to $55.77 per yard or $3.09 per yard per month; and (5) 14 yard debris boxes from $ to $ or $ For the specific rates per size of container, please refer to Exhibit 2. The City also offers lifeline customer rates to those individuals which qualify for either of PG&E s or AT&T s lifeline programs. For these qualifying customers, the cost is 75% of the proposed rates. Please see Exhibit 1 for the lifeline rate. A copy of the notice which was mailed out on November 1, 2007 is provided as Exhibit 3. FISCAL IMPACT: These increases will marginally increase franchise fee and source reduction and recycling element (SSRE) revenues but since the increases are considered minor compared to the overall budgets, staff does not recommend amending budgets as a result of the changes. COUNCIL ACTION: Conduct a public hearing and adopt a revised garbage rate schedule for CY Page 2 of 2

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18 Results From 2015 Rate Survey - Millbrae Exhibit 3 Res1aent1a1 c;ommerc1a1 c;ommerc1a1 14-yara c;ompactea City 32gal 32gal 2yd Debris Box Yard Alameda BurlinQame Campbell Castro Valley Cupertino Daly Citv El Cerrito El Sobrante Fremont Gilroy Hayward Hercules Los Altos Los Gatos Martinez Menlo Park Monte Sereno MorQan Hill Palo Alto Piedmont NIA Pinole PittsburQ Richmond San Bruno San Leandro San Mateo San Pablo SaratoQa South San Francisco Sunnyvale Union City Woodside Total , , , Average 3U.tiH % Adjustment For City Fees % ---- New Rate $ $ $ $ $ Millbrae, current rates Dollar change Percentage change % % % % %