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4163 EAST BAY MUNICIPAL UTILITY DISTRICT October 25, 2001 Mr. Edward Schilling Assistant City Manager City of San Leandro 901 International Boulevard San Leandro, CA Dear Mr. Schilling: DAVID R. WILLIAMS DIRECTOR OF WASTEWATER T y MANX*R NOV 0 6 2001 CITY OF SAN LEANDRO EBMUD has enjoyed meeting with the City of San Leandro City Manager and staff to discuss our proposal to provide wastewater treatment services on a contractual basis. As you know, we propose providing an upfront, lump sum payment to the City of $5M for the lease of portions of the San Leandro wastewater treatment facilities and offering treatment services at a cost such that the City ratepayers would not see any increases in treatment charges for five years. We have reviewed the financial terms set forth in the documents you presented to us on October 8, 2001, and feel we are very close to reaching an agreement that guarantees the $5M up front payment and flat rates for San Leandro, and meets EBMUD's revenue goals for utilizing our excess capacity. Essentially all the terms and conditions we had previously discussed plus the financial projections set forth in your October 8, 2001 documents are understandable and agreeable, except the overhead reduction. The City of San Leandro has indicated that the City's wastewater enterprise is charged approximately $709,000 per year for support services provided by other City departments, essentially an annual overhead charge. It is likely that the need for internal support services will decline upon the transition of the wastewater treatment operations to EBMUD and will ultimately become unnecessary since the treatment function will no longer exist. Therefore we believe the City should be able to phase out the cost of providing the support services. We propose that $100,000 per year for seven years be shifted from the City's internal costs to EBMUD treatment charges as indicated in the attached spreadsheet, however, we would be open to other phase out scenarios. Part of the $5M up front payment could also be applied to keep rates flat should the phase out of the support costs not go according to schedule. The end result is that for the first five years, the City of San Leandro ratepayers would not see any increase in treatment costs; and for the remaining years of the contract, the increases would be indexed to the Consumer Price Index. Based on our analysis, the City of San Leandro would realize significant financial savings of $24M in net present worth. Our proposal provides other benefits such as the economies of scale to meet the costs of future regulations and maximizes availability of land at the treatment plant site for other City uses. We are eager to tailor an agreement that mutually benefits both the City of San Leandro residents and EBMUD ratepayers P.O. BOX 24055. OAKLAND . CA 94623-1055 . (510) 287-1405 M