Both the public and private sectors see increased involvement of the public sector in commercial collections as part of a growing trend.

By John T. Aquino

The United States Environmental Protection Agency estimates that commercial waste constitutes 35-45% of the wastestream. A 1998 R.W. Beck survey of the 400 largest cities indicated, however, that only 5% collected commercial solid waste directly with public-sector resources.

But this low number could be misleading. A 1998 Solid Waste Association of North America (SWANA) survey on solid waste collection in the largest 100 US cities showed a higher percentage of commercial waste collected exclusively by municipal employees–12%–for these wastestreams. There are also signs of growing public-sector involvement in efforts to increase control over the wastestream and to develop additional revenue possibilities in order to fund an MSW system, and more public-sector entities either collect or are considering collecting commercial solid waste or have developed or are evaluating the creation of a commercial solid waste franchise with a single private waste hauler. In November 2001, a consulting firm recommended consideration of a commercial waste franchise for New York City (see "Changing Course with Commercial Waste Collection in New York City," www.wastesaver.com/Franchise.pdf).

John Skinner, SWANA executive director, says that expanding the public sector's presence in commercial collection is fully within the parameter of local governments' responsibility to their communities.

There is no question that the public sector is becoming more competitive in going after commercial accounts, says Bruce Parker, president of the Environmental Industry Association (EIA) in Washington, DC, one of whose components, the National Solid Waste Management Association, is made up primarily of private solid waste firms. "I believe that the private sector has no problem with the public sector competing for commercial accounts as long as the competition is apples to apples, with neither side taking advantage because of who it is and what it does. The public sector, for example, does not use full-cost accounting or pay license fees or taxes."

Skinner and Parker agree that there has not necessarily been a great jumping into the commercial arena by the public sector, as Parker puts it, although it has been a topic of much discussion and some action by the public sector.

Historically, Parker notes, the private sector has done the majority of commercial collection in the US because commercial collection is an arms-length agreement between the hauler and the generator. Traditionally private haulers have been better able to respond to and price the special needs of some generators, such as restaurants and butchers, which might require collections at the end of the day rather than in the mornings, or hotels, which might require different collection schedules. And traditionally residential collection has been done by the public sector; it is more homogenized and entails no negotiations, and the police powers of the public sector have been interpreted as including the responsibility residential waste collection.

Jeremy O'Brien, SWANA's North Carolina—based director of applied research, substantiates that historically businesses were left to fend for themselves regarding waste pickup and to deal directly with private haulers or were provided with public-sector collection only if they were in the central business district. It was a laissez-faire pro-market approach, but it was also due in part to the diversity of commercial businesses, with their varied waste-generation rates and differing needs. A few cities, however, were more aggressive and provided commercial collection to all businesses in their jurisdiction.

Then came the 1994 US Supreme Court Carbone v Clarkstown decision, which held that flow control (the ability of local governments to divert the flow of waste by mandating that it be sent to specific facilities) is unconstitutional and that a municipality cannot preclude private-sector service providers from competing for the opportunity to provide solid waste management services by local government ordinances. Now lacking guaranteed revenue streams, municipalities began to look for alternative ways to fund their solid waste programs. More municipalities began to get into commercial waste collection or to expand their collections of waste from businesses beyond the central business district. A municipality may collect the waste itself or create a mandatory franchise of businesses. Usually the result is that businesses find that they had been paying drastically different rates and that the franchise saves them money, says O'Brien.

Another reason the public sector is reevaluating how it deals with commercial waste collection is its mission to recycle. SWANA's Skinner wrote in the Elements 2000 issue of MSW Management, "Recycling of commercial wastes presents a special problem because many local governments do not engage in or control commercial waste collection. Unless the economics improve significantly, commercial wastes will be recycled in significant quantities only if generators and haulers are required to do so."

Not everyone agrees that commercial MSW collection or commercial waste franchises necessarily save businesses money. A 2001 study commissioned by the City of Sacramento, CA, and conducted by the Walnut Creek consulting firm Hilton Farnkopf & Hobson LLC found wide variations in rates quoted by waste haulers for the same level of service, as well as differences in rates current customers said they were paying. And yet the study also found that many businesses in Sacramento County paid less for trash service than companies in such areas as Roseville and Folsom, which have municipal collection services, or in cities such as Rocklin, Auburn, Davis, West Sacramento, and Woodland, which provide exclusive franchises to single commercial waste haulers in their jurisdictions. (Browning-Ferris and Waste Management Inc., which together collect 90% of commercial waste in Sacramento County, criticized the study.)

The public sector, however, has also argued that, because the mergers and acquisitions among private haulers have reduced the number of competitors, the public sector's possible expansion into commercial collections will spur competitive pricing, to the benefit of residents.

Head-On or by Franchise

Some local governments collect commercial solid waste themselves. For almost 50 years, the City of Garland (TX) Solid Waste & Recycling Services has provided solid waste collection for both businesses and residents. The City of Mesa (AZ) Solid Waste Division offers full-service solid waste removal to Mesa businesses. Jack Friedline, developmental services manager of the division, explains that until the late 1980s, Mesa collected both residential and commercial waste until state legislation required that communities with more than 60,000 residents allow private companies to compete for business. So now it's a wide-open market: Businesses can contract with the city or with any licensed private provider.

The competition is pretty tough, Friedline admits. "But it's actually become easier to compete because now we all use contracts. Historically, the city didn't–we weren't allowed to do that. But five years ago, we decided that if we were going to compete with private firms, we needed the same tools. Now a private firm offers a three-year contract, and so do we."

According to Friedline, Mesa collects between 43% and 44% of its commercial waste, and it has done so for at least the last five years. Friedline doesn't agree with the contention of private haulers that they are better able to deal with the special needs of businesses. "When there are special needs, we route for special needs," he states.

For its rolloff and compactor service for construction, roofing, and other large-scale projects, Mesa's commercial waste division has 20-, 30-, and 40-yd.³ rolloff containers available. All containers are 22 ft. long and 8 ft. wide, although the height of the walls varies depending on container size. Rolloff boxes can generally be set the same day the customer request is received. The division services privately owned compactors as well. The division also has 2-, 3-, 4-, 6-, and 8-yd.³ metal bins available for solid waste disposal and plastic barrels available for curbside collection. Businesses that select this service option receive weekly refuse collection and weekly recycling collection. The division offers commercial recycling programs for such commodities as newspaper and cardboard. Fees vary based on container size and frequency of service. Mesa also offers discounted fees for rolloff containers used exclusively for greenwaste. "We try to integrate residences and businesses together, based on their needs," Friedline maintains.

Other local governments have established exclusive commercial solid waste franchises, and these can provide substantial revenue for local governments. For example, the Plano, TX, 2002-03 solid waste fund municipal budget shows a total revenue of $14,876,685, of which $5,006,954 (33.65%) is from commercial franchise.

In Illinois, Solid Waste Agency of Northern Cook County's (SWANCC) solid waste management plan, which was adopted in April 1991, encourages commercial recycling. Although pilot programs in Arlington Heights, Evanston, Park Ridge, and Wilmette were successful, the pricing to the participating merchants was such that only 30% opted to continue service beyond the pilot phase. To create economies of scale, SWANCC encouraged its members to consider developing commercial waste franchise programs, for which participation was mandatory except for businesses with specialized needs or those that receive service under national or regional contracts. During 1997 and 1998, SWANCC worked with the Village of Skokie to coordinate such a franchise. SWANCC developed a guide to aid communities in developing commercial waste franchises, key points of which are shown in the sidebar.

There are many reasons for creating a commercial waste franchise, notes Brooke Beals, SWANCC's executive director. Skokie wanted to provide recycling to businesses. In September 1998, trustees of the Village of Skokie awarded the village's mandatory commercial garbage collection franchise to Waste Management Inc. (WMI), one of six bidders. According to the trustees, they awarded the franchise without any comment from the business owners and waste hauling companies that had opposed mandatory collection when the concept was approved. The five-year agreement made WMI responsible for all business waste hauling that was not specifically exempted–specialized waste or businesses whose parent companies negotiate waste hauling on a national basis, such as chain grocers. Village officials estimated that the mandatory program could represent a $1 million savings for the jurisdiction's 1,500 businesses, although they say that reducing the amount of commercial waste in the wastestream was a main objective.

It's working well so far, reports Beals. The overall solid waste costs of businesses have been lowered by 40%. "Before this, there was really no rhyme or reason to pricing. It was seemingly profit-motivated, which of course makes sense for the private haulers from a business perspective. But what the franchise did was give the small businesses joint purchasing power. It also makes practical sense in having one hauler. Before this, commercial waste collection in Skokie was fragmented, with multiple companies…. The franchise has basically gotten rid of inefficiencies."

Beals says there was strong opposition to the idea of the Skokie franchise from private haulers, particularly the predominant one in the area. The private companies feel that the private sector is best equipped to meet the private needs of commercial waste collection.

Other SWANCC local governments are considering franchises, but Skokie is the only one so far to pursue it, Beals says, and it did so to make recycling easier and more efficient for businesses.

Pennsylvania's Lancaster County Solid Waste Authority (LCSWA) approaches it differently. There is no public-sector collection in the county, points out Jim Warner, LCSWA executive director. "In a couple of instances, we have locked up a big customer for its industrial or residual waste: –Armstrong World Industries–which is headquartered here–in particular. The authority actually does the collection and disposal for Armstrong's waste; it was such a huge part of the wastestream that we wanted to maintain complete control, and we weren't taking it from a private hauler since Armstrong used to do it themselves.

"But what we've tried to do in all this," continues Warner, "is maintain a balance between competition and retention of the wastestream. We do not want to compete with companies we regulate. But we want to fulfill our goals while allowing waste transporters to do what they do best. If we're going to compete, we do it at the disposal end. We have an owned/operated landfill and transfer station and an owned/contract-operated 1,200-tpd waste-to-energy facility. Since July 1994–really since Carbone–we have entered into contracts with haulers whereby all residential, commercial, and residual waste is delivered to us. We also have arrangements with some waste generators around the county to dispose their waste directly with us for a specified fee. What we're concerned about is the proper disposal of waste."

Warner wrote a Guest Editorial in March/April 2000 MSW Management about competition after Carbone: "[A]djusting to this new evolving business climate includes knowing what parts of your business to compete in and where you need to depend on ‘relationship management.' If you're not driving the collection truck, there needs to be a good reason to bring you the waste … and there are many reasons out there that might entice the private collectors to agree to do so. You just need to create an environment to make them want to cooperate. Who knows, one reason just might be your perceived ability to compete if you so choose."

Legal/Legislative Hurdles

Court decisions seemingly have favored the ability of the public sector to create both residential and commercial waste franchises. Two recent cases concern Portland, OR—based AGG Enterprises, which collects mixed waste and source-separated recyclables from businesses and other generators and hauls the materials to a material recovery facility (MRF). AGG believed that it was prevented from expanding its operations into Washington County, OR, and nearby jurisdictions because county licenses, franchises, and certificates were tightly regulated and the award of a new franchise was rare. It sued the local governments, contending that their solid waste ordinances and related franchise systems were preempted by the Federal Aviation Administration Authorization Act of 1994 (FAAAA), which states that "a State [or] political subdivision of a State ... may not enact or enforce a law … related to a price, route or service of any motor carrier ... or any motor carrier ... with respect to the transportation of property." In a separate suit, AGG claimed that local ordinances unlawfully restricted its new business transportation of mixed waste to MRFs in front-loaded packer trucks because local ordinances that prohibited the commingling of multiple customers' mixed waste also prevented the company from obtaining authorization for such transportation. This complaint sought a permanent injunction against the defendants and a ruling that the ordinances–which had been amended since the first case was filed–were preempted by federal law, unlawfully burdened interstate commerce, and denied AGG equal protection under the law.

The US District Court for the District of Oregon granted the plaintiffs an injunction in the first case, AGG Enterprises, Inc. v Washington County, Oregon, No. 99-1097-Kl, D. Ore., 4/6/00), stating that transportation of source-separated loads of recyclables and mixed loads was covered under the FAAAA and that therefore the local ordinances were preempted under federal law; it is under appeal. In a ruling on the second suit–AGG Enterprises, Inc. v Washington County, Oregon, No. 00-1418-Kl, 4/29/01–the court held that the FAAAA preemption does not cover the AGG packer-truck operations and that there is no equal protection violation and no discrimination against or undue burden or interstate commerce in that the exclusive franchise system was a responsible mechanism to further state interests. SWANA's Skinner says the second AGG suit illustrates that the public sector's greater participation in commercial waste collection is within its prerogative.

Two earlier cases also support the proposition for public-sector commercial waste franchises: Sal Tinnerello & Sons, Inc. v Town of Stonington, 141 F.3d 46 (2d Cir. 1998), which held that a local government may take over MSW operations, effectively dissolving the private market for commercial waste collection, without violating the US Constitution, and Houlton Citizens' Coalition v Town of Houlton, 175 F.3d 178 (1^st Cir. 1999), which held that a local government does not discriminate against interstate commerce or otherwise violate a hauler's constitutional rights when it contracts with a solid waste hauler on an exclusive basis and enacts an ordinance to ensure that all waste is either collected by the contractor or taken to a designated facility.

Emerging from increased actual or potential competition from the private sector has been the concept of just compensation for lost business as a result of hauler displacement. Private waste firms have sometimes sued under the takings clause of the Fifth Amendment of the US Constitution, which requires compensation when the government acquires the property of individuals or companies. Court decisions have varied but have tended to favor the private sector. In Coeur d'Alene Garbage Service v City of Coeur d'Alene, 759 P.2d 879 (Idaho Sup. Ct. 1988), the court found that the city's actions were unjustified because excluding a private hauler did not advance the public purpose of protecting the health residents, while in Laidlaw Waste Systems, Inc. v City of Phoenix, 815 P.2d 932 (Ariz. App. 1991), the court held that the property was not taken because the city was acting as a competitor. In Stillings v City of Winston-Salem, 319 S.E. 2d 233 (N.C. Sup. Ct. 1984); City of Estacada v American Sanitary Service, Inc., 599 P. 2d 1185 (Or. App. 1979); and Calcasieu Sanitation Service v City of Lake Charles, 118 So. 2d 179 (La. 1960), the courts found that the haulers should have known when contracting that the cities could annex their services and terminate their agreements.

With poor results in litigation, the private solid waste industry has lobbied local governments for solutions. At least 12 states have recognized some level of property rights for displaced haulers: California, Colorado, Florida, Iowa, Missouri, Montana, North Carolina, Oklahoma, Oregon, Texas, Virginia, and Washington. The laws provide for governmental notification of its planned action, a transition period, authority of the local action should the hauler fail to perform, and a means for the local authority to displace existing refuse services by providing appropriate compensation.

EIA's Parker notes that these laws apply to both residential and commercial collection. SWANA's O'Brien sees a cause and effect between the Carbone decision, increased competition from the public sector for both residential and commercial waste, and these just compensation/hauler displacement laws. Skinner comments that it is a legitimate concern to duly compensate haulers for property that has been taken. The issues, he says, are the definitions of ‘compensation' and ‘due process.' Skinner uses the example of procedural requirements in Virginia to produce gross receipts for years as a clear case of hindering local governments from competing. A fair process is needed, he states. (In that case, VA Code 15.2-934, Displacement of Private Waste Companies, states, "A locality or combination of localities shall provide five years' notice to a private company before the locality or combination of localities engages in the actual provision of the service that displaces the company. As an alternative to delaying displacement five years, a locality or combination of localities may pay a displaced company an amount equal to the company's preceding twelve months' gross receipts for the displaced service in the displacement area. Such five-year period shall lapse as to any private company being displaced when such company ceases to provide service within the displacement area.")

SWANCC's Beals calls hauler displacement or just compensation laws a tax increase on residents that is not in the residents' best interest.

Wait and See

Public-sector representatives and proponents believe that the public sector's presence in the commercial collection market makes prices more competitive, which benefits residents.

Parker cites William Eggers's Reason Public Policy Institute 1998 publication, Competitive Neutrality: Ensuring a Level Playing Field in Managed Competitions, which makes precisely this case. R.W. Beck indicates that the company has not run any surveys on commercial solid waste collection since 1998. And yet both the public and private sectors see increased involvement of the public sector in commercial collections as part of a growing trend. We must wait for new figures to establish the size and impact of this trend.

John T. Aquino is a Washington, DC—based writer and attorney and is executive director of TASWER (Tribal Association for Solid Waste Management and Emergency Response).

MSW - November/December 2002