Municipalities can be seen as high-cost providers when compared with local private haulers, but a closer look at competing rate structures may reveal that cities are a bargain—and short-changing themselves in the process.

By John Culbertson

For elected officials and city managers across the country, there can be a strong allure to privatize municipal collection services if it is perceived that a cost savings can be achieved. However, for municipalities that provide both residential and commercial collection especially, those perceived savings might be an illusion created by more sophisticated, agile, and flexible pricing strategies employed by the private sector.

A Case Study of Hidden Subsidization of Residential Service

The City of Titusville, on the east coast of Florida in Brevard County, recently developed a five-year business plan and rate structure for its solid-waste collection system. Titusville is one of only two cities in Brevard County that still provide residential and commercial collection with public crews and vehicles. All of the other incorporated municipalities in the county, as well as the county's unincorporated areas, have established independent, exclusive franchises with a private hauler for all single-family curbside, multifamily, and commercial Dumpster service.

The city's residential monthly rates were at the higher end of the scale compared with jurisdictions using an exclusive franchise hauler, while its Dumpster rate was competitive. The city did not have a separate multifamily rate, but rather charged multifamily properties as "commercial" accounts for the Dumpster service provided. One reason the city undertook the business plan development was to understand the pricing differential and to evaluate alternative rate strategies.

Exhibit A shows a comparison, at the outset of the study, of the city's monthly single-family residential rate and the cost of once-per-week 8-yard Dumpster service against the franchise hauler's comparable rates. As mentioned, the city had no multifamily rate.

As shown in the exhibit, although the commercial Dumpster rates were competitive, the city's residential rate was markedly higher than its local private-sector counterpart. An objective of the business plan was to improve operational efficiencies that were perceived to be driving up the city's residential rates.

A complete operational efficiency evaluation was undertaken to isolate and correct the problem, yet this effort provided somewhat confounding results. Although some relatively minor productivity improvements were possible in the residential collection system, the city's crews generally were meeting competitive performance targets, with the two-person refuse collection crews serving an average of 1,300 to 1,400 households per day (in a Lodal EVO sideload collection vehicle).

The city went so far as to evaluate the on-route practices of the franchise hauler serving the county's unincorporated area to confirm that the services being provided in the county were comparable to those in the city. This analysis confirmed that the city's level of service and overall operational efficiency was comparable to the private hauler's.

Having eliminated operational inefficiencies as the culprit in "driving up" the city's residential rates, an alternative explanation for the residential rate discrepancy was ultimately uncovered through a detailed review of the contract between the county and its franchise hauler. In short, the franchise hauler's contract enabled it to apply a wide range of additional fees and rates to commercial establishments and multifamily properties that were not included in the city's rate structure. These additional rates and fees, which were separate from the published Dumpster collection rates, significantly boosted the private hauler's revenue from commercial business and multifamily properties. The City of Titusville had no comparable revenue mechanisms.

Major differences between the city's rate structure and the "hidden" rate structure employed by the private hauler included these:

• Dumpster rental fees ranging from $16 to $31 per month (depending on Dumpster volume) were uniformly charged by the private hauler in addition to the base Dumpster collection rate. No Dumpster rental fees were charged by the city. Rental charges alone accounted for real rate differences of up to 40% between the city's Dumpster rate and the franchise hauler's Dumpster rate.
• Out-of-Dumpster fees per cubic yard of material, such as pallets or oversized items that could not fit in the Dumpster, were uniformly charged by the private hauler, yet these items were picked up for free by the city (often using a grapple truck diverted from a residential route).
• For multifamily properties that had only centralized Dumpster service—which is far less costly and more efficient to provide compared with residential curbside service—the private hauler received a significant premium over the Dumpster rate because of this multifamily rate structure. The city charged multifamily properties only the going Dumpster rate. However, the private hauler was compensated a monthly fee per multifamily unit—set at 75% of the single-family rate—times the number of multifamily units.
• Additional fees for extra services, such as serving gated or locked Dumpster service or wheeled Dumpster walkout service, were charged by the private hauler, while the city had no mechanism for recouping fees for these special services.

The city's consultant, R.W. Beck of Orlando, FL, developed a solid-waste system rate model that overlaid the unincorporated county franchise hauler's rate structure on the city's customer service base. By establishing multifamily household­based rates, implementing Dumpster rental fees, and increasing the billings for out-of-Dumpster and special services, it was calculated that the city's commercial and multifamily customers were receiving over $400,000 annually in discounts from the city compared with what they would be charged under the unincorporated county franchise hauler's rate structure. Stated another way, the city's relatively limited rate structure resulted in $400,000 of revenue not being collected compared with the rate structure used by the franchise hauler.

The city's final business plan successfully addressed these rate discrepancies, which resulted in the city's rates being more closely aligned with those of the local franchise hauler. The city is now charging the full cost for many services it had been providing at a discount or even for free. Of equal importance, the business planning process educated city managers and elected officials of these critical differences in the private-sector rate structures and allowed the city to make an informed decision regarding the future of its solid-waste department.

Other Pitfalls in Public-Sector Service Rates

There are numerous other challenges that exist in the public sector that may misconstrue the true efficiency of the publicly provided solid-waste collection system. Some other common occurrences are described as follows.

Cherry-Picking in Open Systems: Public entities, tasked with the mission of serving the public good in a fair and open manner, customarily abide by a single-Dumpster rate matrix. If public solid-waste providers maintain this operating practice in an open commercial-collection system, where private haulers compete for Dumpster service, the results can be highly detrimental to the public collector. Private haulers are adept at cherry-picking the generators of lighter, fluffier commercial waste and winning business away from the entrenched public collector. The result is that, over time, the public Dumpster service provider is left with the customers who generate heavier waste, which either diminishes the ability of the public service provider to break even, drives up the rates that must be charged to the remaining customers (and making it even easier for the private hauler to cherry pick), or drives the public operator out of the business.

Unbalanced or Oversimplified Dumpster Pricing: While there are multiple algorithms for setting commercial Dumpster pricing, the preferred approach appropriately balances the collection portion and the disposal portion of the total cost to provide the service. Unfortunately, many municipalities that provide public Dumpster collection have relied on outdated or oversimplified methods for setting their rates. The following situations would suggest that the Dumpster rates charged by a public collector might need to be improved:

• Lower prices for small, frequently collected Dumpsters compared with large, infrequently collected Dumpsters where the total weekly capacity is equal
• Dumpster rates that are based entirely on a cost per cubic yard
• Any Dumpster rates that do not have an underlying basis that takes both collection costs and disposal costs into account

The disposal portion of the Dumpster rate should be estimated based on the density of the waste, the size of the Dumpster, and the disposal tip fee. However, the collection portion of the Dumpster cost is only minimally dependent on the size of the Dumpster—it takes just as much labor and operating effort to drive to a 2-yard Dumpster as it does to an 8-yard Dumpster—and this should also be reflected in the Dumpster rate.

Burdensome Public-Sector Accounting and Management Policies: Although public solid-waste collectors are not supposed to be profit-driven, it is no secret that solid-waste operations are frequently relied on by elected officials and senior management to provide a significant annual contribution to the general fund. In some cases this contribution is established in the form of a franchise fee, which is uniformly applied to private-sector haulers as well as to the public solid-waste collector. This typically signifies a level playing field and should not pose a problem for the public operation.

However, many jurisdictions allocate extensive overhead or non-solid-waste-department costs for the purpose of covering numerous other governmental functions—including utility billing, human resources, public works, and even general administration charges. At a minimum, allocated indirect costs can unfairly burden the full cost—and require higher rates—for public solid-waste collectors trying to offer commercial (or residential) service. This may undermine the long-term competitiveness of the public collector compared with the private hauler who would not be "charged" for these city overhead and indirect costs.

Ignoring the Benefits of Rolloff: Although rolloff collection is considered to be the domain of private haulers in many parts of the country, any operationally capable public-service provider that does not at least consider entering the rolloff business is potentially hurting itself by failing to engage in this potentially profitable business. In a hypothetical low-bid scenario for residential curbside collection, pitting a municipal entity that provides only residential and Dumpster service against a private hauler that also has a large rolloff business, the significant margins that may be generated by the private hauler's rolloff business will incrementally increase the subsidy it can offer on its residential rates.

Although there may not be enough rolloff business in many smaller jurisdictions to justify entering the business on a competitive basis, midsize to large cities should strongly consider doing so. A large city in central Florida entered the rolloff business on a competitive basis several years ago, and within three months it was eighth out of 15 providers in terms of market share. Furthermore, the city's margins on the rolloff service vastly exceed that of the Dumpster-collection system. This has all been accomplished with no advertising and no devoted sales force, with a short-time horizon for full payback on the initial investment in trucks and boxes.

Summary

Residential curbside, commercial Dumpster, and rolloff are all important components of a solid-waste-collection portfolio of services. Private haulers competing for business among all of these potential customer bases not only have had to become more operationally efficient to keep prices competitive, but also have become more sophisticated in their pricing and rate-setting strategies.

Public solid-waste providers generally recognize the need to be efficient and to keep costs competitive. Yet given the strategies of private haulers to appear less expensive in both residential and commercial collection services, public solid-waste providers must also stay informed about local franchises, contract terms, and competitive pricing strategies of their private-sector counterparts in order to know where they truly stand.

Author John Culbertson is a senior project manager for R.W. Beck in Orlando, FL. He can be reached at jculbertson@rwbeck.com or 407/422-4911.

MSW - September/October 2004