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John Jermanis February 11, 2002 Page 5 spreadsheet which fails to increase the EBMUD contract rate by 3.5% in years 6, 7 and 8; and our belief that the overhead charge (beginning at $709,000 and escalating at 3.5% per year) should be included in the economic analysis. The Collection System The City of San Leandro is an old city by California standards, and critical pieces of the City's sewerage system were built between 40 and 60 years ago. The City is in the midst of a major program of repairing, relining and replacing major sewerage collection lines at this time, having been alerted to the serious nature of system problems by the extremely wet winter of 1998. While that repair/replacement program is nearly complete, the City faces an equally serious problem in its neighborhood collection system, including the non-public laterals which connect individual homes and businesses to the publicly owned system. In the near future the City needs to commence a major, long-term program of repair and replacement of secondary sewer system lines. The estimated cost of this program over the next few years is expected to be approximately $43 million. Effect on Sewer Rates The City's wastewater user charges cover both the cost of providing wastewater collection and treatment service (labor, chemicals, energy, etc.) and the cost of providing replacement funding for the Enterprise's capital assets. Included in the latter cost are the current costs of replacing old and deteriorating sewerage collection pipes as described in the paragraph above. The City currently budgets approximately $4.6 million dollars annually for water pollution control (including both treatment and collection). If the City contracted for treatment services with EBMUD the rates would not go down. Instead, staff would take the $5,000,000 of pre -paid rent and the $1,000,000 of budgeted Plant capital improvement cash and direct that money towards the $43 million of City collection system capital improvement project described above. Regardless of the City's choice for future wastewater treatment, staff will recommend a wastewater rate increase of between 5% and 6% each year over the next two years. This rate increase is needed not only to fund the capital improvement program described above, but will be needed to fund additional replacement reserves and the increased costs of current operations. The portion of the rate increase related to capital improvements and replacement reserves is 70% of the total increase. Given the identified level of collection system capital improvements (not including any additional funds for replacement reserves), the $6 1::�3