SunnyvaleRTC

July 10, 2003

Chief Financial Officer

Bay Counties Waste Services

P.O. Box 1048

Pleasanton CA 94566

Subject: Proposed Extension of Franchise Agreement

Dear Mr. Dobert:

This letter is in response to the proposal by Bay Counties Waste Services to extend the refuse collection franchise term so that the franchise would expire in 2018 rather than 2011, as at present. To do this would extend the contract term to 27 years.

Following careful review and analysis of the technical, financial and legal aspects of your proposal, the City’s Finance and Public Works departments have recommended to me that your proposal be declined. I concur in that recommendation. I do not believe that the proposed change is likely to be advantageous to the City over the long term for the reasons described in more detail below.

· The net present value of the cost savings over the next 14 years are minimal in the context of this large expense item. Our best estimate is that accepting your proposal would generate savings (compared to the current contract’s terms) through 2018 that have a net present value to the City of $3.3 million over 14 years. (This calculation is based on a 5.86% discount rate, as you have assumed.) Put another way, the total dollar savings to the City over the 14 years would be just 1.8% of the projected franchised hauler payments for that time period and just 1.0% of the projected rate revenue. This is not a trivial amount, but in accepting your proposal the City would be forgoing the opportunity to gain a much larger savings through a competitive vendor selection process.

· The savings described above would be accomplished by using the company’s trucks and equipment for 10 years instead of the current seven years. This lengthening of depreciation is not without cost to the community, as trucks, bins and other equipment will, on average, be older, somewhat less reliable, and somewhat less attractive. Introduction of improvements in truck technology (most notably in the fast-changing area of engine emissions) would not be incorporated into the truck fleet as quickly. Thus the City’s savings could not be achieved without risking reduced reliability of collection, reduced air quality, and reduced quality of appearance of these highly visible features of the community. All of these issues are of concern to our customers and must be weighted against any financial benefits of extending depreciation.

· Assuming that the community is willing to live with the effects of extending depreciation, the City will be able to gain most of the financial benefits of doing so and still retain the option of a competitive procurement for post-2011 collection service. In soliciting competitive proposals for the franchise after 2011, the City can capture 100% (as opposed to 50% under your proposal) of the 2011-2018 savings by simply incorporating longer depreciation periods into the new contract.

· A review of the franchise agreement itself by an outside expert did not reveal any critical flaws or important opportunities for improvement that would add value to the process of reopening the contract to incorporate your proposal.

In light of all of these issues, I concur in the staff recommendation that your proposal not be accepted.

Viewed on its own, the notion of reducing depreciation expenses by using a longer depreciation period is a worthy concept so long as the community concerns I noted above can be addressed. As you know, the franchise agreement contains a mechanism that allows Bay Counties Waste Services to propose efficiency measures to the City. This “Return on Efficiency Clause” provides for the company and the City to equally share the actual savings from a proposal that is accepted by the City and successfully implemented by the company. The City would be receptive to a Return on Efficiency proposal that addresses the topic of extended depreciation. If adopted, this would provide a cost savings to the City and increased profits to your company throughout the remaining term of the franchise agreement.

Similarly, the City is receptive to discussing with you ways in which we can jointly address your concerns about the upcoming need for Specialty to acquire new trucks and equipment whose useful lives extend beyond 2011.

Thank you for taking time to present your views on this matter. In no way should my response to this proposal be construed as indicating a lack of satisfaction with the performance of Bay Counties Waste Services. The City enjoys a good working relationship with your company and remains interested in discussing with you any and all ideas for improving the franchise agreement in ways that benefit the community.

Very truly yours,

Robert LaSala

City Manager

cc: File SW 20.1
Marvin Rose, Director of Public Works

Mayor and City Council