Many cities and counties are taking a hard look at the possibility of expanding control over commercial waste collection.

By Debbie Miller

Although commercial solid waste accounts for an estimated 40-60% of the total MSW generated in most communities, traditionally the private sector has managed this wastestream. In fact, a 1998 survey of the 400 largest cities in the country, conducted by R.W. Beck, indicated that only 5% of the communities collected commercial waste directly with public-sector resources. Today, however, across the nation, many cities and counties are taking a hard look at the possibility of assuming greater control over commercial waste collection.

Where Angels Fear to Tread?

If private waste haulers have been serving businesses, institutions, and industry successfully for years, why would local governments consider disturbing the status quo? The reasons are as diverse as the communities facing the decisions; however, here are some of the most common reasons:

Increase Control of the Wastestream. In the post-Carbone era, "disappearing revenue tons" plague many locally funded solid waste management programs. By taking a more active role in collecting or managing commercial solid waste, local governments can establish "flow control" over portions of the wastestream that were previously "at risk"–a step that may be critical to meeting local financial obligations for landfills, waste-to-energy facilities, composting operations, or material recovery facilities.

Increase Revenue Potential. Many communities are realizing that most private haulers do not rely on residential accounts alone. The commercial sector offers excellent revenue potential.

Act Like a Business. Some local governments are under pressure to "act like a business," which might mean changing the service mix to include residential and commercial customers–just like the average private hauler. Then overhead costs can be spread over more customer units, helping to keep rates competitive for all ratepayers.

Improve Quality or Control Costs. Some communities are finding that their commercial customers are dissatisfied with current services, service quality, or costs. The late 1990s was a time of significant merger-and-acquisition activity among private waste haulers. Theoretically the economies of scale offered by these changes should have resulted in improved pricing and quality of service delivery. In practice, however, the transition challenges left some customers disgruntled and feeling a drop in service quality. Also, some customers reported that prices were unchanged or sometimes increased, and responsiveness to customer needs was compromised.

Implement Policy Objectives. In some cases, the desire to enter the commercial collection business involves policy objectives, such as meeting recycling or diversion goals. The private sector might offer recycling collection services only when markets for recovered materials are strong. Local government control over commercial collection, on the other hand, may result in a more consistent recyclables collection strategy for the business sector.

Spur Competition. In some parts of the country, the merger-and-acquisition activity among private haulers has dramatically reduced the number of viable competitors. One way to spur competitive pricing and service is for local governments to enter the playing field.

Reduce Road, Traffic, and Greenhouse Gas Emissions. In an open system (i.e., one in which private haulers compete for commercial accounts), multiple haulers may have trucks on the road to collect commercial solid waste within a single block or district. The truck traffic results in aesthetic and environmental impacts and routing inefficiencies.

Barriers to Entering the Commercial Collection Business

Despite the potentially viable good reasons for considering commercial collection management, the barriers to entering this market are sometimes prohibitive. Some of the most common obstacles for communities include political considerations, legislative barriers, and operational challenges.

Politics, As Usual

Not surprisingly, private haulers object to governmental restrictions or the elimination of their livelihood–and they often engage active lobbies that wield significant political clout.

Haulers aren't alone. Businesses, too, might object to having their choices taken away. For example, in Santa Rosa County, FL, private haulers compete for commercial customers in an "open" collection system. A recent survey of county business customers revealed that 26% of respondents selected their waste hauler primarily on the basis of cost. Furthermore, 43% of respondents thought they were paying too much for waste collection services. However, nearly 15% of those cost-conscious respondents also identified the freedom to choose waste haulers as a priority.

In local government, a few vocal opponents are sometimes perceived as a "groundswell of public opinion." In addition, many local lawmakers recently have been elected on "reduce government" platforms. With these considerations in mind, the political cost of interfering with existing business waste management programs might be considered too great.

The Law Books

Some communities actually prohibit the local government from providing commercial collection. For example, the City of Pittsburgh, PA, cannot enter into any business in which the private sector is already established, and Denver, CO's charter specifically restricts municipal crews from entering the commercial solid waste market.

In addition, there is a growing trend for states to enact "just compensation" legislation to protect private haulers in historically "free market" collection systems. The laws are based on the Fifth Amendment of the United States Constitution, which states, among other things: "… nor shall private property be taken for public use without just compensation." Just-compensation laws help haulers recover some of their investments in vehicles, facilities, and personnel when a local government assumes responsibility for a collection system or annexes territory previously served by private firms.

Private haulers have had limited success in suing municipalities for encroachment into their markets. Court decisions have sometimes deemed the loss of business due to annexation or municipal organization as "compensable." In other cases, however, the loss has been ruled to be an understood business risk of the private hauler. Thus, the private hauling industry has been lobbying state legislatures to seek remedy.

Currently, at least 10 states have statutory provisions protecting private solid waste haulers from business losses resulting from actions by local government (see Table 1). The protections fall into two broad categories: (1) protection of existing businesses/franchises and (2) payment or compensation for loss of business.

Montana's statute requires that existing haulers must be retained for a five-year period following annexation. Legislation passed in Texas allows, but does not require, customers in an annexed area to maintain their current service provider for a period of two years. Virginia's legislation requires public entities to give five years' notice to a private hauler before displacement or pay displaced firms 12 months of gross receipts. Florida's statute calls for two years' notice or compensation for 18 months of gross receipts but provides an exemption for communities historically controlling collection through permit, certification, or licensure. These communities can modify their collection systems at the end of a permit or licensure period without compensation, provided they meet other notification and public-hearing requirements.

Experience and Know-How

Commercial collection presents unique operational challenges, often involving specialized

• equipment, including operator skill and maintenance capabilities;
• containers, including the space and staff needed for container inventory management and repair;
• routing expertise;
• billing system capability to accommodate frequent change orders;
• sales and marketing expertise.

For public agencies wishing to initiate direct service to commercial accounts, lack of operating experience–although not an immovable obstacle–should be a serious consideration. Factory training and other support resources are needed to ensure that drivers, mechanics, customer-service representatives, billing clerks, supervisors, and managers understand the differences among residential and commercial collection systems, equipment operations, equipment maintenance, and customer management.

Options for Inducing Commercial Collection

According to the same R.W. Beck survey, more than 50% of the largest US cities have open commercial collection systems. In other words, outside of minimal licensing requirements, the local government does not interact directly with commercial collection, and businesses and institutions may select their own private hauler.

Other models for managing or delivering commercial solid waste services include establishing commercial collection franchises or contracts and providing commercial collection services directly with public crews. Under each of these options, there are wide variations in implementation approaches.

Commercial Collection Franchises and Contracts

A franchise is a privilege or right officially granted a person, a group, or a corporation by a government; it is also authorization granted to someone to sell or distribute a company's goods or services in a certain area. Examples are fast-food franchises and local cable franchises.

Many states enable local governments to establish franchises for specific kinds of services, often including solid waste collection.

Because a franchise is a property right, it differs from a contract. In establishing a solid waste collection franchise, a local government assumes control over the collection system and grants the right to provide those government services to one or more franchisee. This assumption of control is a critical element in any potential flow-control debate. Short of providing collection services directly, some attorneys believe that franchises are the tightest method of flow control by agreement currently available to local governments.

Local governments may also enter into contracts with the private sector to provide commercial collection services. Terms of the contract agreements may specify service levels, designate disposal or processing facilities, establish fee structures, and/or delineate customer-care procedures.

In evaluating commercial collection franchises or contracts, local governments must evaluate the following:

Degree of Exclusivity. An exclusive franchise is awarded when a franchisee is given the right to be the exclusive service provider for one or more services in a designated area. In Hillsborough County, FL, for example, MSW is collected from residents and businesses via franchise. The terms of the franchise agreement specify that the franchise hauler has the exclusive right to provide residential collection services within the franchise territory. However, the franchise hauler has a nonexclusive franchise to provide commercial collection services within its territory. In other words, any residential franchise hauler can compete to serve the county's businesses. In Sarasota County, the franchise agreement terms differ. In this community, except for rolloff services, franchise haulers are the exclusive service providers for residential and commercial solid waste within their service-area boundaries.

Mandated Service Levels. Some solid waste management franchises establish a hauler's right to provide service but do not require customers to use that service. In Lexington County, SC, for example, the original terms of the franchise agreements (established in the early 1970s) designated that customers (business and residential) who opted to pay for private collection services would be required to use the franchise hauler for their geographic area. In lieu of private service, customers could self-haul to one of the county's convenience centers or landfills. Other jurisdictions implement franchise agreements in conjunction with "universal" or "mandatory" collection legislation requiring customers to have certain minimal levels of collection service. Because local governments–rather than individual customers–typically pay contractors directly, collection contracts are more commonly established in conjunction with universal collection requirements.

Services Covered. Agreements may specifically exclude certain types of collection services. For example, in Florida, state regulations regarding commercial recycling have led most Florida communities with franchise agreements to exclude commercial recycling from the franchise. In contrast, other communities may develop commercial waste franchises or contracts with the intention of improving access to and pricing for commercial recycling services. Commercial collection agreements may also provide exemptions for construction and demolition waste or rolloff/compactor services. Citrus County, FL, is currently evaluating the potential to control residential and commercial solid waste collection through competitively procured contracts. Because most of the haulers in the county's open collection do not offer bulky-waste removal or separate yardwaste collection, the need to establish minimum service levels for these wastestreams is one of the drivers behind the county's desire to change the current system.

Franchise Fees. It is common for local governments to impose a franchise fee to cover costs of administering the program or to generate revenue. The formulas for calculating such fees vary from very simple systems (e.g., annual per-truck fees) to more complex ones (e.g., percentage of monthly gross revenues).

Going Public

There are two primary strategies for public collection of commercial solid waste: (1) requiring local businesses to use local government—provided services or (2) competing with the private sector for commercial customers.

Arguably, most local governments directly engaged in commercial collection are "the only game in town" and are often protected by local ordinances that require businesses to use public services. But some communities–such as Mesa, AZ–actively compete for market share with local, regional, and national waste-hauling firms.

However, getting into the commercial collection business requires a significant capital investment in

• front-load collection trucks (though some communities collect commercial waste with rearloaders on a small scale),
• containers and container delivery vehicles,
• maintenance capabilities for collection vehicles and containers (welding and paint shop capabilities),
• facilities (to support additional staff, vehicles, and maintenance functions).

Beyond the expected operational demands of running and maintaining new equipment and containers, however, local governments must devote special attention to routing, sales and marketing skills, customer care, and setting rates or collecting fees.

Approaches to Route Design and Management

The private sector typically uses one of two methods to route commercial stops: map pinning or grid routing.

These methods provide for the most efficient routing and eliminate trucks crossing paths, servicing stops near each other, or providing service in the same area on different days. The commercial management team needs to know the address of a stop and frequency of collection to properly route a stop.

The map-pinning method requires a large map for each day commercial service is provided. A colored or numbered pin is placed in the appropriate location on each of the maps at locations where service is required. The colored or numbered pins indicate the route providing the service. Using this approach, it is then easy to divide the stops among the available routes using the pins as a visual aid. When a new customer desires service, this approach helps the commercial manager in assigning the account to routes that have room to accommodate the additional demand.

The grid-routing system divides the service area into grids with identifying letters and numbers such as A1, B2, and so on. Each stop is assigned a grid number. The goal of the grid-routing system is to enter the grid as few times as possible. Therefore, if the stop with the most collections is twice per week in a grid area, all once-per-week stops in that zone are placed on either of the two days (based on which has the fewest stops). Then the grids can be divided into routes based on number of daily collections. There might be situations in which a driver services a stop one day a week and a different driver services the same stop on a different day; the grids may shift to different routes on different days to provide for better route equity.

Sales and Marketing

Unless a local government requires businesses to use its services, competing with private haulers demands a trained and effective sales and marketing force to approach potential customers, handle changing customer needs, and provide a liaison between customers and operational personnel. Unlike private businesses, most local governmental agencies are unaccustomed to selling their services. Thus, this aspect of the commercial collection business often presents cultural challenges.

Customer Care

Customer care includes communication systems, responding to customer needs, and billing capabilities. These demands can be substantial.

Some local governments delegate customer-care functions to other departments or utilities. For example, the City of Kissimmee, FL, provides customer care and billing services on behalf of its commercial waste franchisee through the Kissimmee Utilities Authority, the municipally owned electric utility servicing all city customers. The city's commercial franchise hauler pays an administrative fee to the solid waste department covering the authority's costs to provide the services. Because the authority already had a sophisticated phone system, customer database, and billing system (hardware, software, and personnel), customer-care functions could be internalized.

Rate Setting

Setting rates is always challenging for local governments. There is often tension between collecting sufficient revenue and controlling costs to ratepayers. In addition, local governments often struggle with the issue of rate equity–for example, should commercial rates subsidize residential rates?

The two most common approaches for setting commercial rates involve charging a flat fee per cubic yard per pickup versus charging fees based on the cost to service any given stop, plus the costs that vary by container size (container capital and operation and maintenance [O&M] and disposal costs).

The cubic-yard method is more common in municipalities because it is easy to calculate and communicate. Proponents of the service-cost method argue that the cubic-yard method does not necessarily distribute costs appropriately among customers. For example, assuming $3.75/yd.³ per pull, the cubic-yard method would yield $32.48 per month for a 2-yd. container serviced once per week and $129.90 for an 8-yd. container serviced once per week. Alternatively, using the cost-of-service method and an estimated $5.07 per stop (assuming operating costs of $63.34 per hour for a commercial collection truck and an estimated 4.8 minutes per stop), the service-cost method would yield $37.86 per month for the 2-yd. container serviced once weekly–$4.37/yd.³ per pull–and $74.58 for the 8-yd. container serviced once per week–$2.15/yd.³ per pull. The service-cost method may provide incentive for businesses to select the largest practical container size with the lowest practical collection frequency, which provides for operational efficiency. Please note that these costs are estimates based on reported costs in one southeastern community. To calculate locally appropriate service costs, a community must evaluate average pounds per cubic yard of commercial waste and local labor, capital, and O&M costs, as well as productivity estimates.

Making the Decision

A community must answer several key questions before it considers taking greater control over its commercial waste collection system. For example:

• Do you need the waste flow (and associated revenue) to support existing or planned solid waste management infrastructure?
• Do you have the "political will" to disrupt the current commercial collection system?
• Can you sufficiently demonstrate the benefits of expanded control over the collection system to the business community and other stakeholders?
• Do you have sufficient resources–money, staff, and expertise–to operate or control commercial collection?
• Can you address the administrative demands of rate setting, sales and marketing, billing, and ongoing customer service?

If the answer to these questions is yes, your community might find that commercial waste collection is a vital part of its waste management system, providing revenue security and offering customers the quality and types of services they desire.

Debbie Miller is senior project consultant with R.W. Beck in Orlando, FL. This article is based on research conducted by R.W. Beck while developing the "Getting More For Less" Collection Efficiency Workbook and Workshop for SWANA.