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John Jermanis February 11, 2002 Page 2 The initial HDR Report, based upon a very preliminary level of economic analysis, concluded that Scenarios 1, 2A and 3 were within 10% of each other in cost and should be considered as essentially equal and worthy of additional study and analysis. Scenario 2B was estimated to have annual costs of operation about 20% greater than the status quo, so it was removed from further consideration. A second HDR Report, which was delivered in draft form on March 30, 2001, included considerations related to the Castro Valley Sanitary District and explored nine scenarios for the City of San Leandro. The conclusion of that report was that the Oro Loma options would not save San Leandro ratepayers significant money and, because of uncertainties regarding the need for upgrades to the Oro Loma plant, it recommended rejecting the Oro Loma proposal. The second HDR Report concluded that it would be both physically and economically viable for EBMUD to take over treatment of San Leandro wastewater, but that this alternative would involve loss to the City's General Fund of an overhead charge of approximately $700,000 per year which exceeded the estimated savings to ratepayers of $621,000. The overhead charge represents the wastewater treatment plant's share of various indirect City costs including Finance, Human Resources, General Government and Information Systems. The only other scenario which appeared to be more favorable than the status quo was one whereby the City of San Leandro treatment plant would remain in operation and additionally accept wastewater from the Castro Valley Sanitary District. This scenario, however, works to the disadvantage of the Oro Loma Sanitary District which provides collection and treatment services to a significant number of City residents. Based on the two HDR Reports, staff was ready to recommend that the City continue treating wastewater at its own plant. Prior to forwarding that recommendation, the City received on March 5, 2001 an improved proposal from EBMUD (copy attached) that included the following features: • An initial minimum payment of $5 million as a prepaid lease for use of the City's headworks and land; and • A guarantee of no cost escalation over the City's current wastewater treatment budget for five years. Based on this revised EBMUD offer, staff of the City and EBMUD started a process of meeting to ensure that the elements of the EBMUD proposal really were cost neutral in the first year, and that the elements could be successfully translated into a formal proposal and ultimately, if approved, into a contract for service. Those discussions concluded with an October 24, 2001 letter from EBMUD (copy attached) detailing the final form of their offer. �M