To: Honorable Mayor and Members of City Council
From: Phil Brun, Utilities Director
Prepared By: Kevin Miller, Materials Diversion Administrator
TITLE:
Title
Napa Recycling & Waste Services 2022 Contact Amendment
LABEL
RECOMMENDED ACTION:
Recommendation
Adopt a resolution authorizing the Utilities Director to execute the 2022 Contract Amendment to City Agreement No. 8687 with Napa Recycling & Waste Services, LLC (“NRWS”) for a term through December 31, 2031, for the collection and transportation of Municipal Solid Waste, Recyclable Materials, and Compostables, and operation of the Napa Materials Diversion Facility, and determining that the actions authorized by this resolution are exempt from CEQA.
Body
DISCUSSION:
The original and existing contract between the City and NRWS labeled the “Contract for the Collection and Transportation of Municipal Solid Waste, Recyclable Materials, and Yardwaste and the Operation of the Napa Materials Diversion Facility” (City Agreement No. 8687) provided for a 10-year base term, from January 14, 2005 through December 31, 2015, with options to extend the term for up to four additional one-year terms. Council authorized three one-year extensions for calendar years (CY) 2016, 2017 and 2018. As used in this report, the term “NRWS Agreement” refers to City-NRWS contract (City Agreement No. 8687), as amended on March 1, 2005, July 6, 2010, and July 30, 2014.
On April 17, 2018, the 2018 Contract Amendment to NRWS was approved by Council (Council R2018-043). The 2018 Contract Amendment reset the compensation “base” of the NRWS Agreement extended the agreement for services 14 years through December 31, 2031.
Because many the costs of compliance with some regulations and permits were as yet unknown/undetermined at time of the 2018 Contract Amendment, some items were essentially placeholders until those costs were known and identified. This was particularly true for installation, operating and maintenance costs for the Covered Aerated Static Pile (CASP) composting and upgraded stormwater management systems at the MDF (both of which became operational in early 2020). It was also true for a few key compensation items such as the “Reconciliation Review” process to measure and compensate NRWS for growth (or decline) in services over remainder of the contract term. As such, the proposed 2022 Contract is necessary. The proposed 2022 Contract Amendment is attached to this staff report as Exhibit A to the authorizing resolution (Attachment 1).
HIGHLIGHTS OF PROPOSED 2022 CONTRACT AMENDMENT
As noted above, the underlying major drivers of the proposed 2022 Contract Amendment are (1) costs of CASP composting system, (2) costs of upgraded stormwater management system and (3) costs of results of Reconciliation Review process to account for growth (or decline) is collection service provided by NRWS each year. City staff and NRWS have also arrived at several other mutually agreed “deal points” during contract negotiations that are reflected in the proposed 2022 Contract Amendment. The highlights are summarized below:
1. Fixed Annual Adjustments: The 2018 Contract Amendment extended the term of the contract by 14 years beginning with contract year (CY) 2018. The first 5 contract extension years (CY2018 through CY2022) had a fixed annual adjustment of 3.5 percent per year for NRWS labor costs and 2.5 percent per year for non-labor costs and then various published indexes that would apply starting with year six of the extension (CY2023). The proposed 2022 Contract Amendment would continue the fixed 3.5 percent per year for labor through the end of the contract term (CY2031). It would also continue the fixed 2.5 percent per year non-labor costs for the remainder of the contract (CY2023 through CY2031) with a limited reopener. The limited reopener would apply if non-labor costs increased by more than 5 percent in a given year from CY2023 through CY2031. If non-labor costs exceed 5 percent, then the City and NRWS would equally share these increased costs above 5 percent. For example, if non-labor inflation cost were 8 percent in a given year, then the City and NRWS would split the increase above 5 percent being 3 percent. In this example, the City would pay an additional 1.5 percent (half of 3 percent above 5 percent) and NRWS would absorb the other 1.5 percent. City staff feels this agreement is fair to both parties and gives both the City and NRWS long-term predictability for cost and compensation while providing a shared “safety-valve” when there are extraordinary increases in costs.
2. Increased Operating and Capital Costs: As noted above, two of the main drivers of the proposed 2022 Contract Amendment are increased capital and operating costs associated with the new CASP composting system and upgraded stormwater management system. The MDF operates under several permits including a Solid Waste Facility permit, an air permit and a stormwater permit. The regulations and permits for the facility have all become much more stringent (and expensive) for the City and NRWS as its facility operator to remain in good standing and in full compliance. While the 2018 Contract Amendment had some placeholder anticipated costs for operation of the CASP composting and upgraded stormwater management systems at the MDF, the proposed 2022 Contract Amendment has the benefit of adjusting to known, real-world permit and regulatory conditions. These costs include a new lab technician position (primarily for the extensive emissions testing and record keeping required by the Bay Area Quality Management Board’s permit for the facility) and an additional compost/stormwater operator position (NRWS originally requested 1.5 such positions but ultimately agreed to one additional operator). A new water truck ($208,000) is included in the 2022 Contract Amendment as well as a new grinder ($950,000). The water truck applies “contact water” (meaning high solid runoff that has come into contact with organic materials) back to the active compost material as no discharge of contact water is allowed from the MDF under the stormwater permit for compost operations. The grinder was anticipated to be replaced in 2024 in the 2018 Contract Amendment, but repairs on the original grinder were estimated to cost the City approximately $260,000 and not deliver the same performance as purchasing a new grinder would afford the MDF operations for the balance of the contract term.
The extensive emissions testing required by the air district also required a new lab office and equipment. The 2018 Contract Amendment anticipated that this would be subcontractor service to NRWS but it was determined that purchasing the lab testing equipment and hiring of a lab technician as an NRWS employee would be more cost effective for both the City and NRWS over course of the contract and help assure that the MDF would remain in full compliance with air permit conditions and reporting requirements. Additional capital improvements were made by NRWS to the MDF including concrete work, installation of fencing and other permanent improvements to the MDF as necessary for successful operation of the upgraded stormwater system.
3. Reconciliation Review Process: The 2018 Contract Amendment anticipated a new “Reconciliation Review” process that would replace the previous “Cost Review” process. The previous Cost Review process was conducted every three years and attempted to predict future growth. While needed and well-intentioned, the process proved to be inherently flawed. Either the City would pay NRWS for growth that never occurred (unfair to the City and City rate payers) or NRWS would not be adequately compensated for services and equipment provided to customers for growth that occurred but was not predicted by the City in the three-year projections. The new Reconciliation Review process attempts to solve the issue of growth by conducting the process more frequently (every other year for residential and commercial customers and every year for roll-off box customers). It also looks “backwards” for actual collection service data and measurements to establish whether service levels have increased or declined over time. As noted above, the metrics and process for the Reconciliation Review process were not fully developed nor finalized at the time of the 2018 contract amendment. While the 2018 Contract Amendment anticipated the first Reconciliation Review process for both residential and commercial service to begin in year three (CY2020) of the fourteen year extension, NRWS agreed to forego the first Reconciliation Review year in light of the impacts of COVID-19, particularly in the spring of 2020 when shutdown orders were in place.
The proposed 2022 Contract Amendment has resolved which metrics will be used and over what comparison time periods. The Reconciliation Review metrics derive from the original competitively bid NRWS proposal costs (as escalated by inflation). For residential service, this is based on a per household cost. For commercial service, this is based on a per “lift” (meaning lifting and emptying commercial carts or bins for landfill, recycling and composting collection service). For roll-off (debris box) services, the metric is the number of “services” as compared to what NRWS can deliver with four roll-off trucks and drivers (with the City having the option to direct NRWS to add a fifth roll-off truck and driver if growth levels are sustained and that becomes a more cost effective option for the City and City rate payers). Because roll-off service is compared against the base service capacity (i.e., service level that four trucks and drivers can provide), the revenue reconciliation will occur every year. Because collection service revenue is City revenue at City-set rates, revenue covers the additional compensation to NRWS in busy, high growth years.
Finally, the 2018 Contract Amendment had language that a mechanism for the unique growth impacts of the Napa Pipe development would need to be addressed in the Reconciliation Review process. The City and NRWS have arrived at a mutually agreeable method that would provide NRWS additional compensation when Napa Pipe residential customers occupy Napa Pipe development properties and become new City/NRWS customers.
FINANCIAL IMPACTS:
The cost of the proposed 2022 Contract Amendment is fully budgeted in the City’s FY2022/23 Solid Waste and Recycling (SWR) Enterprise Fund. This includes a $3.5M carryforward from the FY2021/22 budget for one-time supplemental payments for both operating and capital expenses as well as compensation to NRWS for previous growth as determined by the Reconciliation Review process described in the above staff report.
The total additional compensation owed by the City to NRWS from the proposed 2022 Contract Amendment is as follows:
One-Time Supplemental Payment for Contract Year (CY) 2020: $944,338.90. This includes $888,060.71 for difference between what was paid to NRWS under the 2018 Contract Amendment terms, $26,641.82 for the 3% base profit margin and $29,636.36 for interest as negotiated by the parties (based on City’s LAIF interest rate for FY2019/20 of 3.24%)
One-Time Supplemental Payment for CY 2021: $935,356.55. This includes $908,113.15 for difference between what was paid to NRWS under the 2018 Contract Amendment terms and $27,243.39 for the 3% base profit margin.
One-Time Supplemental Payment for January 2022 through September 2022: $674,970.16 which $74,996.68 per month times nine months. This includes $72,812 for difference between what was paid to NRWS under the 2018 Contract Amendment terms and $2,184.37 per month for the 3% base profit margin.
The additional compensation for October 2022 through remainder of City FY2022/23 based on the Proposed 2022 Contract Amendment has been budgeted in the SWR Fund (City expenditure account number 51060514-53724).
Residential Reconciliation Review compensation to NRWS for growth in CY2021 (based on contract terms and calculations described in Attachment U and U-1 of proposed 2022 Contract Amendment) is a lump sum of $59,878.06.
Residential Reconciliation Review compensation to NRWS for growth in CY2022 (based on contract terms and calculations described in Attachment U and U-1 of proposed 2022 Contract Amendment) is $14,196.33 per month with a one-time supplemental payment of $127,766.93 for January 2022 through September 2022 (S14,196.33 per month times 9 months).
The additional compensation to NRWS for results of Residential Reconciliation Review process for October 2022 through remainder of City FY2022/23 based on the Proposed 2022 Contract Amendment has been budgeted in the SWR Fund (City expenditure account number 51060514-53729).
Commercial Reconciliation Review compensation to NRWS for growth in CY2021 (based on contract terms and calculations described in Attachment U and U-1 of proposed 2022 Contract Amendment) is a lump sum of $412,355.10.
Commercial Reconciliation Review compensation to NRWS for growth in CY2022 (based on contract terms and calculations described in Attachment U and U-1 of proposed 2022 Contract Amendment) is $45,037.67 per month with a one-time supplemental payment of $405,338.99 for January 2022 through September 2022 ($45,037.67 per month times 9 months).
The additional compensation to NRWS for results of Commercial Reconciliation Review process for October 2022 through remainder of City FY2022/23 based on the Proposed 2022 Contract Amendment has been budgeted in the SWR Fund (City expenditure account number 51060514-53729).
Roll-off (debris box) service Reconciliation Review compensation to NRWS for growth in CY2019 (based on contract terms and calculations described in Attachment U and U-1 of proposed 2022 Contract Amendment) is a lump sum of $74,327.92.
Roll-off (debris box) service Reconciliation Review compensation to NRWS for growth in CY2020 (based on contract terms and calculations described in Attachment U and U-1 of proposed 2022 Contract Amendment) is a lump sum of $306,042.50.
Roll-off (debris box) service Reconciliation Review compensation to NRWS for growth in CY2021 (based on contract terms and calculations described in Attachment U and U-1 of proposed 2022 Contract Amendment) is a lump sum of $104,426.65
Roll-off (debris box) service Reconciliation Review compensation to NRWS for growth in CY2022 (based on contract terms and calculations described in Attachment U and U-1 of proposed 2022 Contract Amendment) is a lump sum of $7,840.56.
The additional compensation to NRWS for results of roll-off (debris box) service Reconciliation Review process for CY2023 will be based on CY2022 service measurement for CY2022 and will be paid as a lump sum in City FY2022/23. This cost element of the Proposed 2022 Contract Amendment has been budgeted in the SWR Fund (City expenditure account number 51060514-53729).
The SWR Enterprise Fund draws on three major revenue sources being collection service rate revenue, materials sales revenue and City MDF gate fee revenue. Collection service rates were adjusted as of January 2022 based on City Council action in 2019 and (along with materials sales and gate fee revenue) are adequate to fully cover the additional compensation to NRWS of the proposed 2022 Contract Amendment in current approved SWR Fund budget for FY2022/23. The impacts of the proposed 2022 Contract Amendment, along with additional costs of compliance with state law (SB 1383), will be factored into the next multi-year rate study and rate setting process which will be conducted next calendar year (2023).
CEQA:
City staff recommends that the City Council determine that the Recommended Action is exempt under CEQA Guidelines Sections 15301 and 15302 since it (1) involves the operation of an existing facility involving negligible or no expansion of use and (2) consists of replacing or reconstructing existing structures located on the same site and will have substantially the same purpose and capacity as the structure replaced. In addition, City staff recommends that the City Council determine that the potential environmental effects of portions of the Recommended Action were adequately analyzed by an Initial Study and Mitigated Negative Declaration adopted on November 7, 2013 (Resolution No. PC2013-15) that was prepared for the Napa Renewables Resources Project (File No. PL 12-0022); Technical Addendum dated June 23, 2014; Technical Addendum dated January 17, 2017; and the Notice of Determination for the Covered Aerated Static Pile system dated March 5, 2018 (issued in accordance with Resolution No. 2018-013). Based upon this prior review, subsequent environmental review pursuant to CEQA Guidelines Section 15162 is not required.
DOCUMENTS ATTACHED:
ATCH 1 - Resolution
EX A - Amended and restated City-NRWS contract incorporating the Proposed 2022 Amendment to Agreement No. 8687 with Term through 2031
NOTIFICATION:
Greg Kelley, General Manager/Managing Member, Napa Recycling & Waste Services (courtesy copy)
Mike Murray, Chief Financial Officer, Napa Recycling & Waste Services (courtesy copy)