PB-225 332
PUBLIC REGULATION CONCEPT IN SOLID WASTE MANAGEMENT
NATIONAL ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS
PREPARED FOR
ENVIRONMENTAL PROTECTION AGENCY
1973
Distributed By:
National Technical Information Service
U. S. DEPARTMENT OF COMMERCE
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PUBLIC REGULATION CONCEPT
IN SOLID WASTE MANAGEMENT
A Feasibility Study
This publication (SW-54d) uae prepared for the
NATIONAL ASSOCIATION OF REGULATOR! UTILITY COMMISSIONERS
under Federal solid watte management grant no. G07-EC-00338-01
U.S. ENVIRONMENTAL PROTECTION AGENCY
1973
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This report has been reviewed by the U.S. Environmental Protection
Agency and approved for publication. Approval does not
signify that the contents necessarily reflect the views
and policies of the U.S. Environmental Protection Agency, nor
does mention of commercial products constitute endorsement
or recommendation for use by the U.S. Government
An environmental protection publication (SW-54d)
in the solid waste management series
ii
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31014?
TABLE OF CONTENTS
Chapter Pane
1 INTRODUCTION AND OBJECTIVES 1
2 MAJOR ISSUES 5
A. Management and Organization 5
B. Legislation 7
C. Fi nance 8
D. Replicability of Systems 9
3 ANALYSIS 13
A. Management and Organization 13
1. Minneapolis, Minnesota 15
2. Tacoma, Washi nqton 19
3. Des Moines, Iowa 21
4. Oregon 24
5. State of New Jersey 27
B. Legislation and Legal Issues Relating
Solid Naste Management to the Public
Uti1i ty Concept 35
1. Existing Solid Waste Legislation 35
2. Competition 48
3. Role of State, County, and Municipal
Agencies 52
C. Finance 56
1. Methods of Generating Operation Funds 56
2. Rate Determination and Rate Regulation 60
a. Development of Uniform System
of Accounts 60
b. Issues Involved in the Determination
of the Rate of Return 77
c. Operating Ratios 79
d. Rate Regulati on 86
3. Methods of Finance 90
a. Private Debt and Equity Financing 90
b. Lease-Purchase Agreements 91
c. Revenue Bonds 91
d. Pay-As-You-Go System 93
4 FINDINGS AND CONCLUSIONS 95
111
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LIST OF ILLUSTRATIONS
Figure Title Page
1 Major Issues, Sub-Issues, and Options 11
2 Case Study Matrix 14
3 Summary of Fifty State Legislation Canvass 36
4 States With Regulatory Authority in Solid Waste 44
5 Distribution of Operating Expense 62
6 Comparison of Operating Costs Between Cities 82
7 Comparison of Financial Ratios Among Cities 83
8 .Cities In Which Cost Data Were Collected 84
9 Management and Organization 100
10 Legislative and Leaal 106
11 Finance 110
iv
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1
INTRODUCTION AND OBJECTIVES
Historically, public utilities have been formed in situations where a
necessary public service was being performed by a private firm and the
nature of the service dictated some limitation on competition or entrance
into the field. Usually the factor which dictated limitation on competition
was the duplication of capital equipment needed to provide the service (e. g. ,
water or sewerage pipes, gas lines, electrical conduits, etc. ). The reason
for organizing such services as utilities was that public convenience or
necessity dictated the need for the service and the elimination of duplication.
Then, as a result, this monopoly or oligopoly situation dictated the necessity
for rate regulation. Rate regulation is required because the monopoly situa-
tion removes the normal rate balance achieved by the free market system.
In the absence of competition, an external force, a regulatory body, is
needed to protect the public from rate excesses and to control the profits of
firms which operate under considerably reduced risk by virtue of their
publically vested monopoly.
It is important to note the nature of a public utility, the forms it may
take, and how it operates. Clearly, the mondpoly or oligopoly condition
which generally dominated the utility form has, in more recent times, been
revised. It is a misconception that a public utility has a single form which
is clear cut and universally applicable. This is not the case. Rather,
centralization is the key issue in any public utility concept and this issue,
in and of itself, operates at various levels of control. A minimum
criterion for a public utility is that it be regulated by a state or local
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agency of government. However, at lower levels, wide variances
can occur in the actual operation of the public utility. For example, within
the framework of the traditional public utilities such as gas, electric, and
telephone, a single unit in a totally monopolistic condition exists at the
level of operations. In the trucking and transportation industries, which are
regulated by many state public utility commissions, a totally open competition
condition exists, v/here there is ease of access to the field as well as egress.
The substance of the public utility control here is, in fact, one which is simply
over rates and service. Therefore, the operational characteristics of a
public utility are not limited to a single unit or a small number of units. A
public utility concept can, in fact, operate over a larger number of units
of suppliers in the field and for all intents and purposes, practically in an
open competition condition. Thus, while public utilities may take on various
forms which are suited to the needs of a particular industry, they still adhere
to the general definitional precepts of a public utility, which are as follows:
A public utility is a business organization which performs
a necessary and convenient public service. It is specifically not
operated by a governmental entity. It operates primarily to serve
the: public needs but is permitted to make a profit in serving these
needs. It is regulated, with respect to quality of operation, by a
public agency and with respect to rates, by a public utility com-
mission.
The objectives of this study were as follows:
To determine whether solid waste management meets the
traditional requirements for a public utility situation, and
if it does,
To describe specific forms such a utility might take, and to
identify which forms provide the best service for the least
cost and offer probable improvements over existing systems.
The concept of centralization in solid waste management is not new.
Rather, systems which are highly centralized and thus similar to public
utilities have been in operation in various forms in many parts of the country
over the past few years. Thus, after closer examination of the field, it was
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determined that a re-focusing of the original approach to this study was
necessary. Rather than examining utilities in other industries to determine
applicability to the solid waste management field, the effort was re-formulated
to consist of a study of the near utilities which already exist in this area.
Thus, the new thrust of this study was to attempt to identify a unified
form of a solid waste public utility which would offer significant efficiencies
of operation and opportunities for financing which might be needed, but not
otherwise available, to a solid waste system. .
Historically, solid waste systems have operated throughout the country
at one extreme as part of a municipal government or, at the other extreme, as a
series of private contractors serving^in completely open competition, both ,
residential and commercial customers. Neither of these variations has
proved completely satisfactory in all facets of the operation. In the first
case, municipal systems often lose efficiency in their refuse operations due
to the practical-limitations of bureaucratic and political constraints and, in
many cities, because of the lack of complete financial control over refuse
operations. The private sector, on the other hand, has the normal profit
motive to point it toward operating efficiencies; but in an environment of
completely open competition, many of these efficiencies are lost through
excessive price competition and the overlap of operating areas. Conversely,
in private sector operations with limited or no competition, the opportunity
exists for excessive profits in light of no risk or competition.
The objectives of this study are to define what a public utility might
be in solid waste management, what forms it might take, and whether these
new or unique forms might provide more efficient and more economical ser-
vice to the community than existing systems. The study that Applied
Management Sciences has conducted is called a feasibility study, but it is
really much more. It is an analysis of several versions of near utilities
now in existence in solid waste management and how these versions have
dealt with real day-to-day problems in collecting and disposing of solid
waste. It has explored the financial opportunities available to a utility in
establishing the capital equipment and operating monies needed for operation.
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It has examined the legislative framework which now exists at the state,
county, and municipal levels in this field and the types of legislation needed
to permit this concept to work in the future.
The study emphasis has been to extend beyond assessing the theoretical
conditions and applications of feasibility to encompass the practical.
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MAJOR ISSUES
There are several major issues which were examined in this study
in an effort to find the elements of feasibility and desirability of the
concept. These major issues are discussed below.
A. MANAGEMENT AND ORGANIZATION
There are clearly many approaches to the management and organi-
zation of solid waste collection and disposal services. For disposal, the
management and organization structure is usually centralized under the
control of a public works or public health department and, in most instances,
the largest portion of disposal remains an operational activity of the public
works department. At the other extreme, though rarely found, disposal
can be operated and controlled purely by the private sector. In many major
cities throughout the country, disposal is operated by the private sector
and controlled by public health regulation. In fact, few rate regulations
apply to disposal, aside from competition in the private sector and some
publicly adjudged equitable price when operated under a public works or
public health department.
For management and organization of the collection function, there
are a wide variety of methods. Simplifying this concept, it should initially
be noted that collection must be considered on the basis of both commercial
and residential collection. Commerical collection normally is private
enterprise in its purest form. In most cities, it is unregulated by any local
public organization and there is, in fact, no limitation upon the number/and
or type of private contractors involved in serving commercial Customers.
Residential collection is considerably more complex. The residential collection
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management and organization structure ranges from total public control
to a totally private operation, which is usually confined to smaller cities
or county areas. Public control is most typically under the operations
of the public works department. Once again, in the most common
public agency, the public works department attempts to regulate the
quality and service of a group of private contractors in essentially open
competition for residential business.
Thus, one question to be addressed is what form is best for solid
waste in terms of a management concept: a traditional public utility with
public utility commission control over a single or many bodies, a traditional
public utility that is under public utility control with limited competition,
a near-public utility form which provides for limitation on competition with-
out the public utility commission control, simple control under some other
public body, or, finally, no control at all over the field.
Moreover, the scope of the operation of a hypothetical utility needs
to be carefully defined. For example, is only the municipality to be
served or are the suburban areas contiguous to the city also to be included?
Is a truly regional concept feasible in this sense and should regional ser-
vice by a single entity be made part of the utility? Should residential and
commercial service be included or only the so-called "public responsibility"
for residential service? Should collection and disposal both be a part of
the utility concept or should only one or the other of these major functions be
included? Clearly, these questions concerning the management and organi-
zation revolve around four major management and organization questions,
and these are:
Is centralization of collection into one entity necessary
or desirable ?
Is regionalization a practical part of the solid waste
utility concept? If so, for both collection and disposal?
Should residential and commercial collection be included
as part of the concept or only residential collection?
Should collection and disposal functions be combined or
separated in the utility form?
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B. LEGISLATION
The second set of major issues is concerned with legislative matters.
The limitation of competition is an important issue which is both legislative
and operational in nature. Completely open competition is the hallmark of
our free open market economy; however, it is not in concert with many
forms of the utility concept in which relatively minor to severe limitation
on competition is necessary for efficient performance of the service. Most
forms of the utility concept are dependent on some limitation on competi-
tion and in the extreme cases, on a monopoly situation. Eminent domain
is another legislative issue which is an important part of this study.
In the case of most transfer stations and sanitary landfills, the selection
of their location is always a controversial subject since "nobody wants one
in his backyard."
A third legislative issue is one that faces the interaction of city and
county governments throughout the country and that is how much or how
little should each level of government be involved in solid waste manage-
ment. Finally, among state-level governmental agencies, the question
of the extent and nature of the role of each agency in solid waste manage-
ment is an important one. In a specialized field like solid waste manage-
ment, the Public Utility Commission would be involved only in rate regu-
lation since it would have no interest or capability in matters of health or
environmental protection. The state environmental agency or health
agency would be-the logical agency to have cognizance over the health or
environmental protection associated with the solid waste operation.
Clearly, developing a working relationship among state-level agencies is
an important legislative issue if there is to be state regulation.
In summary, there are four key legislative questions which must be
addressed in the analysis:
Is limitation on competition desirable?
Is eminent domain specifically for solid waste necessary at
the state level and as a vested power of the utility?
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What role should the municipalities and counties play in the
management of solid wastes ?
What is or should be the regulatory function of the public
utility commission or public service commission and other
state agencies such as the environmental agency?
C. FINANCE
The next class of major issues deals with financial issues. The first
of these involves the method for raising revenues to finance solid waste
operations. At the municipal level, there are two general methods of
accomplishing this end: The first is through tax levies on real estate, sales or
income which would be used for all municipal services including solid waste.
The alternative to this method is to charge an amount separate from
real estate tax levies, which is earmarked for solid waste operations only.
This leads to the question of how closely service rates do and should
reflect service.rendered. That is, should a resident who has a
very difficult solid waste collection situation pay proportionately more for
service, or should the city at large be responsible, to some extent, for
this additional margin of service? The matter of.additional incentive
charges also is an important part of service rates, that is, charges
which are large enough to motivate people to locate their refuse in a place
compatible with the system. This arises in unreasonable collection situa-
tions such as multi-floor walkups, people housing their refuse in their
garage or in some locked compartment, etc. Often an incentive charge
for collecting in these extraordinary places is necessary to provide the
homeowner with enough motivation to make his refuse more accessible to
the collector. For those instances where service rates vary as a function
of the level of service provided or as part of an incentive scheme, such
rates will be defined as user charges.
The entire question of capital financing of the refuse collection and
disposal service is another major financial issue to be addressed. As an
adjunct to this issue, the necessary amortization or depreciation period
for this capital equipment is another important issue from several stand-
points. First, the write off on this type of equipment is a key element of
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annual operating expenses as well as a part of replacement philosophy.
Second, a reasonable assurance of a contract period encompassing the
depreciation period is needed in order to ensure the private collector
against losing the contract before the vehicles are fully depreciated.
The final financial issue to be considered deals with the assessment
of an appropriate profit level for a solid waste management operation.
The traditional mode of operation for a public utility organization is to
acquire profit based on a rate of return concept. In the field, the rate of
return concept is, in fact, the profit rate on either invested capital or on
sales. It is one purpose of this study to determine which of these measures,
if either, is appropriate within the field of solid waste management. Through ,
a comparative analysis of a number of systems, an attempt is made to scope the
overall rate of return consideration. In summary, five financial questions
appear to be paramount:
Should municipal revenues such as real estate tax levies
be used to cover operating costs in this industry?
Should rates be, in fact, user charges which reflect specific
service rendered? If so, how should they reflect service
rendered?
What type of financing is necessary, desirable, and avail-
able to collection systems for capital equipment replace-
ment?
What types of depreciation periods are applicable to this
industry, and do most contracts or franchises cover
adequately this depreciation period?
What are the requirements for a rate base and the rate
of return? Is this return on investment or return on sales;
and what is the scope of reasonably expected rates of return
under a public utility mechanism?
D. REPULCABILITY OF SYSTEMS
An additional set of issues is concerned with the transferability
of systems from one city to another. Some common parameters of
replicability are population, demographic, and geographic characteristics
of the area. In many cases, these characteristics permit classification
of cities and the type of government services offered within them. Another
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parameter of applicability might be urban and rural characteristics.
Particular types of systems may be applicable in an urban or rural
environment, but not both. Another parameter of applicability might be
the degree of industrialization. Still another might be the prevailing
labor market from which this industry can draw people. Also, special
characteristics of the city (e.g. , prevalence of alley-type collection
situations or a prevalence of row houses as opposed to separate, single-
family units) would be a determinant of breadth of application. Finally,
one problem of paramount importance may be just the pure practicality,
in a political sense, of imposing a certain structure on a different city.
Briefly, then, five questions of replicability can be cited:
Are the population and/or other demographic characteristics
of the area serviced important?
Are urban, rural characteristics important to replicability?
Does industrialization on the local labor market affect
replicability ?
Are there special operational characteristics of the city
such as alley pickups which affect replicability?
Do political conditions exist, on a broad enough scale, to
allow replication of various utility concepts?
In summary, these management, legislative, financial, and replica-
bility questions were addressed in the study from several different view-
points, and consolidated into one list of three issues and twelve sub-issues,
and the options which are available for each of these twelve sub-issues.
A list of these issues and their options is presented in Figure 1. The
analysis section should be read in light of these issues and the development
of feasible or desirable options within them.
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FIGURE 1: MAJOR ISSUES, SUB-ISSUES, AND OPTIONS
ISSUES
MANAGEMENT AND
ORGANIZATION
LEGISLATION AND
LEGAL
FINANCE
SUB-ISSUES
Centralization Level
Administrative Level
Collection Ownership
and Operation
Disposal and Recycling
Ownership and Operation
Residential /Commercial
Coverage
Regulatory Level
Competition
Eminent Domain
Rate Regulation
Capital Financing
Rate of Return
User Charges
OPTIONS
None City County Region State
None City County Region State
Private City County Region State
Private City County Region State
Residential Commercial Residential and
Only Only Commercial
None City County Region State
Free and Open JvT,*1101"^ Monopoly
^ (Oligopoly)
None Public Utility City County Region State
None City Coxinty Region State
Private Private General Operating Revenue
Debt Equity Fund Revenues Bonds
?6gU]ated Regulated
Open market based on , ° ,
j , j , , based on
determined capital
. ^ , revenues
investment
By Class By service
None Commercial- rendered
Residential within class
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ANALYSIS
At the initiation of the study, consultation with the Public Utility
Commission had, in fact, yielded a significantly broader definition of the
putlic utility concept than the traditional single unit, monopolistic approach.
Based on this input, it was determined that a number of near utility organi-
zations already exist in the field of solid waste management. As a result,
it was deemed beneficial to the project objectives to organize our study
around those near utility conditions and to explain the requirements for
broadening their base or directing their applications more toward the
public utility concept. These near-utility concepts will be discussed in
this chapter according to the major issues addressed in the previous
chapter. A matrix of the case studies and how they relate to the major
issues appears in Figure 2.
A. MANAGEMENT AND ORGANIZATION
The management and organization of solid waste systems involve not
only the operating systems but the environment in which they function.
This includes governmental level of control and administration, regulatory
level, ownership of operations, and coverage of service. One important
parameter of a solid waste management system which affects the manage-
ment and organization is the site of the operation in terms of the geopolitical
area served. Three of the basic geopolitical units for solid waste manage-
ment are the municipality, the county, and the region or area. A solid
waste management system based on any of these units has certain positive
Preceding page blank
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Issues
MANAGEMENT
AND
ORGANIZATION
LEGISLATION
FINANCE
Sub-Issues
Centralization Level
Administrative Level
Collection Ownership
and Operation
Disposal and Recycling
Ownership and Operation
Residential /Commercial
Coverage
Regulatory Level
Competition
Eminent Domain
Rate Regulation
Financing
Rate of Return
User Charges
Minneapolis
City
City
City /Private
Private
Residential
Only
City
Franchise
Yes
Negotiated
Contract!/
Private Debt
Not
Regulated
Service
Rendered
Tacoma
City
City
City
City
Residential
and
Commercial
City
City
Monopoly
Yes
City
Operating
Revenues
Regulated
based on
Revenues
Service
Rendered
Des Moines
Region
Region
Region
Region
Residential (Collection)
Residential and Com-
mercial (Disposal)
Region
City Monopoly-Disposal
Hybrid -Collection
No
Negotiated
Contract
Private Debt/
Revenue Bond
Non-Profit
None (Fixed Charge)
Oregon
County
County
Private
Private/
County
Residential
and
Commercial
County
Franchise
Yes
County
Private Debt
Not
Regulated
Service
Rendered
New Jersey
State
None
Private
Private/
County
Residential
and
Commercial
State
Free and
Open
Yes
State
Private Debt
Regulated
Service
Rendered
Negotiated with MRI, but no regulation as such.
FIGURE 2: CASE STUDY MATRIX
Reproduced from
best available copy.
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and negative attributes which are direct functions of the unit being served.
The case studies of existing systems discussed on the following pages
illustrate each of these. In addition, there are management and organiza-
tional approaches such as those which exist in New Jersey which are in-
dependent of the minor geopolitical units. These are worthy of investi-
gation and are also discussed on the following pages.
The City of Tacoma, Washington, represents an extreme example of
centralization. There is a city operation which is run as a utility, except
that rates are not regulated by a PUC or any other body external to the
normal municipal channels, and which has control over all aspects of
solid waste management in the city. The situation existing around
Des Moines, Iowa, is the regional or area approach to solid waste manage-
ment. Des Moines will be examined to highlight the benefits and problems
of a regional solid waste management organization. The approach in Oregon
is on a county level with the individual counties having responsibility for
solid waste management. The Oregon system features long-term contracts
to private haulers under a franchise arrangement. This system will be
examined to show how the system is operated and the major factors affect-
ing such a system.
The management organization in Minneapolis, Minnesota, is somewhat
unique. The system is centralized in that it only deals with the City of
Minneapolis; however, functionally, the responsibility for solid waste
collection and disposal is split between the municipal system and the
private contractors represented by Minneapolis Refuse, Inc. , which is a
for profit corporation composed of private contractors in the city. This
unique operation will be examined and its salient features highlighted.
1. Minneapolis, Minnesota
The City of Minneapolis has responsibility for the collection
and disposal of household refuse generated within the political and geo-
graphic boundaries of the city. Operationally, refuse collection is handled
by both the Department of Sanitation and the private sector. There are
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approximately 120,000 residential units to be served in the city. Approxi-
mately 60 percent, or 72, 000 units, are handled by the private sector while
the remaining 40 percent, or 48,000 units, are serviced directly by the
city.
The relationship between the city and the private sector is unique.
The city does not deal with each individual collector; rather, it deals with
Minneapolis Refuse, Inc. (MRI), which is a corporation composed of solid
waste firms. The city contracts with MRI specifying that MRI will service
a given number of units at a fixed rate per month. This contract is binding
upon the members of MRI which assigns routes to the various collectors.
The relationship of MRI with the private firms is similar to that of a prime
contractor with his subcontractors since the MRI pays the private contractors.
Under the terms of the agreement with MRI, the city pays a fixed
rate of $2.55 per month per household. Within MRI, two separate rates are
paid to the subcontractors based upon whether the stop is an alley pickup
or a "walk-back" pickup. In the case of alley pickups, subcontractors
receive $2.24 per month per household; and in the case of "walk-backs",
they receive $2.99 per month per household. The $2.55, then, represents
an average over all households served. If a person desires more frequent
pickup of refuse, he must make a separate agreement with the private
sector, even if he is collected by the city. This supplementary service is
not covered in the contract between the city and MRI. The city contract
covers multiple dwellings such as apartment houses and rooming houses.
For each occupied apartment, the city pays $2. 55 per month; for rooming
houses, four occupied rooms equal one apartment for accounting purposes.
In addition to the delegation of responsibility for the collection of
a major portion of the residential wastes, the City of Minneapolis has
followed the same approach in the disposal operation. All of the residential
disposal is franchised to a single private contractor, Phoenix Industries,
who, based upon a standardized rate schedule , operates, maintains, and
disposes of the residential wastes deposited to transfer stations located
in the north side and the south side of the city. The terms of the contract
The rate schedule for Phoenix Industries is shown in Appendix A.
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include a five-year period, beginning at its date of execution of May 20, 1971.
It is contingent upon a performance bond being supplied by the contractor
each year. Price increases are .subject to an agreed-upon annual schedule,
which was specified as part of the bid requirement and provides a formula
increase or decrease rate based on the contractor's experience each year.
The funding for solid waste management comes from the general
fund. Although solid waste collection and disposal fees do not appear as a line
item on the tax bill, the homeowner is still paying directly for solid waste
management, services. Prior to instituting th.e agreement with MRI, an
increase in the property tax rate of 5. 8 mills was approved. It was expected
that this extra revenue would pay the cost of solid waste collection and dis-
posal services. In a sense, the comme rcial-industrial sector is, therefore,
subsidizing the collection and disposal of household refuse. The 5. 8-mills
increase in the tax rate applies to all property even though the commercial-
industrial sector is not included in the agreement between the city and MRI.
The financing structure for the equipment in the Minneapolis
system is shared between the city and the private contractors for collection,
and is exclusively in the hands of the private contractor for disposal. One
of the motivating factors in the development of this franchising condition
was the city's desire to limit their capital expenditures in the field of solid
waste management. As a result, trucks, containers and other equipment
used in solid waste management are purchased directly by private con-
tractors in the service of their routes. The major benefit to the city under
this condition is their ability to minimize the effect on the city's debt ceil-
ing or borrowing authority. As a specific requirement of the contract, the
collecting agency, MRI, was required to place a $300, 000 bond in the hands
of the city. The disposal group was also required to develop a substantial
bond.
The agreement between MRI and the city, which appears in
Appendix A, is effective for five years. On expiration of the contract, it
is the present intention of the parties to renew the contract for a second
five-year term. The renewal may not be arbitrarily refused by either of
See Appendix A for a complete description of the unusual method of
computing assessed value of real estate. Its results in a much lower
assessment, and therefore tax revenue than it appears to provide.
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.,j^*
the parties so long as the city and MRI have complied with all provisions of
the contract. A unique feature of the agreement between the city and MRI
is the provision for renegotiation of the price schedule. The agreement
calls for a renegotiation of the price schedule on the following dates:
January 1, 1972; January 1, 1973; and January 1, 1975. If agreement has
not been reached as to a renegotiated price term within thirty (30) days sub-
sequent to any of the above stated dates, the dispute or controversy shall
be submitted to arbitration.
The Minneapolis agreement has a number of advantages. First,
the city does not have to finance a. large solid waste management system.
The city can take advantage of the organization and equipment of the private
sector. A second advantage of the Minneapolis operation is the length of
the contract. The five-year term allows a collector to amortize his
equipment, and the city gains the advantage of a long-term contract. The
five-year-renewal period provides both the private sector and the city
with the knowledge that they will have a long-term agreement if both
parties successfully meet their obligations. Another unique feature of the
agreement between the city and MRI is the provision for renegotiation of
charges which prevents either party from being locked into an unfavorable
situation. Still another unique provision allows the city to examine the
books of MRI and MRI to examine the books of the municipal operation.
The accounting information developed will allow the city to determine if it
is more economical to use the existing private sector or to expand the
municipal operation. The knowledge that their costs will be compared to
the costs of the municipal operation should help to ensure that the charges
of the private sector remain reasonable.
Minneapolis represents one of the more advanced relationships
between the municipal authority and the locally based private sector in the
field of solid waste management. Although it has only been in operation
about nine months, the experiment appears to be working well. Collection
service is generally good and complaints are minimal. While the private
sector has requested, and been granted, a 6-percent rate increase, they
still provide service at a rate lower than the city. Further information on
Minneapolis is contained in Appendix A.
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2. Tacoma, Washington
The City of Tacoma, Washington, is another example of a
centralized solid waste management system. In the City of Tacoma, all
solid waste collection and disposal, both residential and commercial-
industrial, is handled by the city through its Department of Public Works'
refuse utility. The Tacoma operation is, in fact, similar to the rather
typical public works department approach found in any number of cities.
It differs in its requirement to contribute a "profit" to the municipality.
A municipal utility does not adhere to the previous definition of a public
utility since it is not a private company subject to regulation. However,
it fits a class of municipal organizations which merit examination
The solid waste management system in Tacoma is an example
of a centralized system in the following respects: By law, only the refuse
agency can perform solid waste collection and disposal activities in the
City of Tacoma. All private contractors are excluded from this activity.
The refuse collection and disposal activities are centralized in the sense
that one organization, the refuse agency, has complete responsibility for
all solid waste activities in the city.
This centralization is an advantage in designing and implementing
a solid waste management system because the single agency can design
routes in a consolidated manner to achieve operating efficiency. Such route
consolidation is also possible through franchising of private collectors or
through the typical municipal operation, demonstrating an attribute which
is not limited to a utility concept mechanism.
A second characteristic of the municipal utility concept as
practiced in Tacoma is that the revenues and expenses of the operations are
treated as a separate revolving fund subject to the necessity to make a
profit and the accountability for costs. It is a profit and cost center which
permits the management of this service. In 1929, the initial funds were
appropriated for its establishment, with the requirement to be a financially
self-sustaining entity. The refuse agency charges for its service and is
required to return 8 percent of gross revenue to the city as a gross revenue
tax.
19
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The Tacoma system employs an elaborate scheme of user
charges related to service rendered which is a function of number of cans,
distance to the pickup point, and flights of stairs. This scheme permits
people to pay for the level of service they receive and to reimburse the
utility in a way that is more directly proportional to the cost of providing
the service to each individual residence or business. '
Another characteristic of the system is that it services both
residential and commercial customers and, therefore, is permitted to
offset the less profitable residential operation with the more profitable
commercial. Instances in which both commercial and residential service
is offered by a single agency may be viewed as a subsidy by the commercial
customers of the residential operations. It has recently purchased front-
loader packer trucks and containers to more efficiently handle commercial
service. This equipment difference must be recognized in systems which
service both residential and commercial customers.
Finally, a municipal utility is able to obtain land for solid
waste operations within its geopolitical boundaries. As an extension of
the city government, the refuse utility has the power of eminent domain.
In Tacoma, land for disposal has not been a problem; but if it becomes one
in the future, it has the tools to deal with it.
Tacoma suffers from no obvious disadvantages in service or
costs. However, it must be pointed out that the ten-year equipment depre-
ciation period and the commercial subsidies cloud the financial picture.
Supporting the financial confusion is a lack of clarity in the apportionment
of certain charges between the refuse agency and other city operating
departments.
It is probable that the Tacoma system is an anachronism
developed as a result of 1929 standards and political atmosphere, and not
likely to be replicable on a broad scale today. A more complete description
of Tacoma appears in Appendix B.
20
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3. Des Moines, Iowa
The Des Moines Metropolitan Area Solid Waste Agency, here-
after called the Agency, is an example of a regional approach to solid waste
management. It is an attempt to handle solid waste management on an area-
wide basis rather than a county or municipal level. The Agency is a quasi-
governmental body with mayors and city councilman from surrounding com-
munities making up its board of directors. In November, 1969, eleven
towns, five cities, and two counties in and around Des Moines, Iowa,
created the Des Moines Metropolitan Area Solid Waste Agency (DMMASWA).
This intergovernmental Agency was set up as a non-profit corporation with each
member community having one representative on the board. Each board
member has one vote for each 50, 000 in population. The purposes of the
Agency are as follows:
a. To provide for the economic disposal, or collection and
disposal, of all solid waste produced or generated within
each member city, town, and that portion of each member
county as the Board of Supervisors shall determine to be
part of the metropolitan area, comprising the munici-
palities.
b. To cooperate with local, state, and federal public health
agencies in preventing the contamination and pollution of
the land, water and air resources of the area, through
the control, collection and disposal of solid waste.
c. To engage such employees and provide offices, equip-
ment, machinery, buildings and grounds as are neces-
sary to adequately perform the functions of the Agency.
d. To contract with member cities, towns and counties,
with public or private persons, firms or corporations
for the disposal, or collection and disposal, of solid
waste, and collect payment for such services, and to
receive and expend state, federal and private grants
and other monies which may be made available, to the
extend permissible under applicable state and federal
laws, and under the rules hereinafter set forth.
The Agency is responsible for the collection of residential
wastes in those areas that choose to come under its authority. The areas
surrounding Des Moines do not have to contract the Agency for the collection
21
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of solid wastes. These political entities are free to make any arrangements
they wish for the collection of solid wastes. Also, the Agency does not
handle commercial or industrial wastes. The commercial-industrial
sector has been left to the private contractors.
Each community among the 16 participants in the DMSWA con-
tracts for either collection and disposal or just disposal services. The two-
year contract that the City of Des Moines now has with the Agency calls for
a charge of $2. 00 per month per residential unit. The city can and does
invoke its statutory powers to enforce payment of fees, but the Agency
(DMMASWA) assumes the risk of delay in payment. If and when rates are to
be changed, the board would request renegotiation of rates with the city (or
any of the communities using the service), which would then renegotiate
the rate with the city.
The regionalization of solid waste collection activities has not
worked out as well as planned. Not all of the political entities have chosen
to use the Agency for the collection of solid wastes. This is somewhat
surprising in that the Agency charges less than the private contractors for
equal or better service. While the Agency charges $2. 00 per month per
household for once-per-week backyard pickup of garbage and rubbish with no
limit on the number of containers picked up, private contractors charge
from $2. 25 to $2. 75 for equivalent service. Furthermore, in some cases
in private collection, there is a limit of three cans picked up with a charge
for extra containers. The Agency is able to offer this lower rate in part
because as a non-profit agency no income taxes are paid. Other tax
advantages not open to profit making companies are also available to
this agency.
The reasons for not using the Agency are not completely rational
in the economic sense. Some areas do not use the Agency. They associate
the Agency with the previous municipal system in the City of Des Moines
which was known for its poor work practices and haphazard operations.
Another factor which has retarded use of the Agency for collection is the
22
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uncertainty over the fate of a proposed revenue bond issue and doubt over
the Agency's ability to purchase a needed landfill site.
After January 1, 1972, all solid waste disposal in the area
covered by the 16 jurisdictions came voluntarily under the handling of the
Agency. New state-level environmental laws have made "dumps" and open-
burning illegal. Those areas that had "dumps" were faced with the prospect of
having large financial-expenditures in order to improve the quality of their
disposal sites. Probably the greatest factor in the use of the Agency for
refuse disposal is the unpopularity of disposal sites, even sanitary landfills.
A regional disposal system eliminates the need for each political entity to
maintain a disposal site. In spite of its regional charter for disposal, the
Agency's full powers under eminent domain are uncertain. The location of a
new fill site is currently being vigorously resisted with no indication they
will be successful in obtaining the site. Perhaps its greatest accomplish-
ment has been convincing the political areas that regionalization is a viable
concept in the disposal function.
The financing of collection equipment-in Des Moines has been
through short-term private debt and lease-purchase agreements. Initially,
when the Agency was formed, $206, 000 is being paid to the City of Des Moines
to purchase their existing equipment. Subsequently, replacement vehicles
have been purchased on lease-purchase agreements. Land for a disposal
site is being obtained by a $2, 000, 000 revenue bond at 5 percent interest
for 15 years. The proceeds from this bond will cover landfill equipment
as well as the land itself in two sites; Metro Park East, which is already
in operation, and Metro Park West. The land for these two sites was
obtained through conventional means, and eminent domain was not used,
even though the Agency has this power by virtue of the composition of its
board.
A more complete description of the Des Moines operation
appears in Appendix C.
23
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4. Oregon
The Oregon approach to solid waste management differs from
the approach in Tacoma and Des Moines. The Tacoma and Des Moines
systems represent municipal and regional approaches, respectively,
whereas the Oregon system is a county-level approach to solid waste
management. Another basic difference between the Oregon approach and
those of Minneapolis, Tacoma, and Des Moines is that, in Oregon, solid
waste management is handled by private contractors under a franchising
arrangement, whereas in Tacoma and Des Moines solid waste functions
are handled by the public sector.
In Oregon, under the provisions of H. B. 1051, the counties
were delegated the power to franchise out the collection and disposal of
solid wastes in unincorporated areas. Incorporated areas have the privi-
lege of using either the county system or providing solid waste manage-
ment services through some other means. The counties have the authority
to form and join regional or area-wide solid waste management systems.
Currently, 34 counties are in the process of developing franchise arrange-
ments, and of these, 16 already have franchising in operation. This
involves a total of over 50 franchises issued to private contractors.
The county franchising system is usually formed after the Board
of Commissioners declares that an emergency exists in solid waste matters.
Meetings are held with the private contractors and new routes are formed,
customers are traded, and consolidation of routes takes place. Customer-
trading is encouraged for a number of reasons. In the first place, it allows
the collectors to shorten their routes and decrease unproductive travel
time. Secondly, customer-trading allows the private collector to establish
an area where he serves the majority of establishments and thus qualify
for a franchise area.
With respect to the "Major Issues", the situation in Oregon is
one of operational centralization at the county level or at the private firm
level as determined by the county. The very nature of this particular
24
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franchising mechanism is that the county solid waste board determines the
size and number of franchised areas. The collection function is owned and
operated entirely by private firms while disposal is conducted by both
private firms and county government. Disposal sites are difficult to oper-
ate in a sanitary manner in Oregon because of the high rainfall and, there-
fore, in some counties private firms have not gotten into this function and
the county must maintain its own site. Franchises include both residential
and commercial coverage, so within the franchised area it is truly a
monopoly.
The counties have the power to regulate the rates charged for
service. The prevailing rate schedules throughout the state are user
charges and are based on the frequency of pickup and the number of cans.
A complete rate schedule for the entire state appears in Appendix D.
The counties have a mandate to provide satisfactory service at a reasonable
rate, not at the lowest possible rate. A reasonable rate is one which is
fair to both the customer and the collector. A fair rate for a collector is
one which generates enough revenue to meet all business expenses and
returns a reasonable rate on investment. Unfortunately, no mechanism
exists for determining reasonableness since collectors are not subject to
audit or uniform accounting--they are free to keep their books in any
lawful manner.
Another unique feature of the Oregon system is the time period
of the franchises. Realizing that collectors would be hesitant to invest in
equipment that could not be amortized over the life of the contract, the
counties decided to award multi-year franchises. Franchises are awarded
for a ten-year period, which is a long time when compared to most con-
tracts or franchises. Generally, most solid waste agreements do not
extend beyond five years, which is a long enough time to allow the collector
to fully depreciate his investment. Internal Revenue permits four- to five-
year depreciation for these types of trucks because this is the average
useful life of this equipment. The collectors have additional security in
that if they provide satisfactory service they will continue to hold the
franchise.
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Another unique feature in the Oregon system is its lack of
formality in determining rates in the face of an otherwise formal regulatory
process. There is no uniform accounting system and no official definition
of a fair rate of return. The County Board of Commissioners determines
whether a rate is fair or not based on the evidence presented in rate hear-
ings, which may differ not only from county to county, but within county.
The private firms holding the franchises all use private sources
of financing (mostly debt rather than equity). The existence of the franchise
enhances their borrowing power in at least an indirect way since the equip-
ment supplier has evidence of a long-term income stream if the collector
continues to provide adequate service to his customers. In one instance
out of the approximately 50 franchises already issued, the collector actually
assigned the proceeds of his franchise as collateral for an equipment loan.
The Oregon system has a number of advantages. In the first
place, the Oregon system uses the existing organization and facilities of
the private sector. As a result, the county does not have to finance capital
expenditures in a solid waste operation from its general debt fund. Further,
in the Oregon system the responsibility for solid waste management is given
to the political unit with the power of eminent domain. This can be very
important when the county decides it needs additional acreage for a dis-
posal site. A particular advantage of the long time frame of the franchise
occurs in the collectors' ability to fully depreciate any equipment used in
servicing the franchise area. The collectors are no longer reluctant to
buy equipment to service an area. As long as the collector provides satis-
factory service at reasonable rates, he will retain the franchise. It should
be noted that the above benefit could be obtained with a shorter franchise
period. The ten-year franchise period appears to unnecessarily limit
competition by its length and is probably not necessary to achieve the same
objectives. Conditions throughout the country dictate shorter franchise
periods (3 to 5 years).
26
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As with any other structure, there are a number of negative
aspects which must be considered. In the first place, the system is limited
to unincorporated areas of the county. Incorporated areas, generally the
densely populated regions, do not automatically come under the county
system. Secondly, even though counties have the authority to join regional
associations, this has not happened and it appears unlikely that an individual
county would share or surrender its control over solid waste activities.
Rate-making is another area in which the possibility of abuse exists. Lack
of a uniform system of accounts and hearing each rate case on its own
merits make it possible for similar contractors to be earning different
rates of return while providing the same level of service. Another disad-
vantage of the Oregon system is that the ten-year franchise limits compe-
tition. A shorter franchise period, such as five years, would still allow the
private sector to fully depreciate its equipment while providing the county
with the benefits of competition on a more frequent basis.
The existence of certain unique features in Oregon such as the
lack of the large urban concentrations and the close working relationship
within the private sector may be responsible for the apparent success of
the county franchising system. A complete case study of Oregon appears
in Appendix C.
5. State of New Jersey
In New Jersey, a state-level approach to the setting up and
regulation of solid waste utilities is being implemented. This approach is
not concerned with the operation of any one of these utilities but, rather,
the broad framework within which they are required to operate.
Prior to the passage of the "Solid Waste Management Act
(1970)", there was very little effective control of solid waste activities on
either an environmental or an economic basis in New Jersey. Those regu-
lations which existed were either on a county or municipal basis. There
was a lack of planning and coordination at local levels and at the state level,
there were no effective means for dealing with solid waste on a statewide
27
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basis. Solid waste was, for all intents and purposes, an unregulated
activity. Consolidation of state policies for solid waste management was
one of the primary reasons for passage of the Solid Waste Management
Act.
New Jersey contains a mix of solid waste systems. The
collection function is split between private contractors and municipal
systems. The larger cities usually provide residential solid waste ser-
vices with commercial services being contracted to private haulers.
Smaller municipalities usually contract out all of the collection to private
haulers. In the rural areas, the individual usually makes his own arrange-
ments for the removal of solid waste. The operation of disposal sites is
again split between governmental units and the private sector. Counties,
municipalities, and private individuals own and operate disposal sites.
Under the New Jersey laws, almost all aspects of solid waste
collection and disposal have been covered. The law is split into two
sections. Title 39, known as the "Solid Waste Management Act (1970)"
(shown in Appendix Das Exhibit A), provides for the inspection and
registration of all solid waste facilities in the state by the Department of
Environmental Protection (DEP). Any landfill operator, incinerator
operator, or solid waste collector must have a certificate from the DEP
before he can legally operate. The economic aspects of solid waste are
regulated by the Public Utilities Commission (PUC). Title 40, known as
the "Solid Waste' Utility Control Act of 1970" (shown in Appendix D as
Exhibit B), places with the Public Utilities Commission (PUC) the
responsibility of certification, rate settings, and rate regulation for solid
waste collection and disposal service.
The New Jersey situation permits complete decentralization
and free and open competition among private contractors. Decentralization
is used in the sense that no collector has exclusive rights to any operating
area, and any collector may compete for customers anywhere.
28
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Administration of the operation of each utility is the responsibility
of its management. However, the PUC does have a set of administrative
responsibilities of its own. A great deal of the PUC's administrative
activity to date has been in registering landfills and collectors. All land-
fills that charge a dumping fee are required to register with the PUC and
file a tariff of their rates. These rates hold for anybody who has a license
to dump solid waste. As long as a person has a valid license to haul solid
waste, he can dump at any site where he is willing to pay the rates. Under
the laws of New Jersey, the landfill cannot refuse to accept solid waste
from a licensed, registered collector of solid waste; nor can the landfill
owner charge any rates but those on the filed tariff. The PUC has also
spent much time and effort in getting the solid waste collectors to register.
At first the collectors were not registering with the PUC as the law re-
quired; however, when inspectors refused to let unregistered collectors
use landfills, the collectors soon registered.
The DEP has focused its administrative activities on the landfills
and disposal facilities in the state. Exhibit C in Appendix D includes
regulations pertaining to disposal sites. All disposal facilities must be
registered with the DEP. In order to be certified, formal application must
be made as shown in Exhibit D in Appendix D. The DEP certificate says
that the landfill operator is registered with the state. In order to be
registered, an operator must: (1) submit an application to the DEP; and
(2) must submit .a landfill design that was prepared by a licensed engineer.
The landfill design states how the site will be run, its expected volume,
and the type of refuse it can accept. The application and landfill design
must be submitted each year.
As suggested in the foregoing paragraphs, the PUC and DEP
have administrative functions in collection and disposal, but no operational
functions or ownership. Operation and ownership are left to private
individuals or municipalities, if the municipality chooses to take on this
function. A municipality which has its own collection fleet, and serves
outside of its municipal jurisdiction, is subject to certification and review
29
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by the PUC on the portion of its service outside the municipality, because
it is serving "the public" on that service.
One administrative problem has been the lack of precise
definition of solid waste collector. Originally, over 2000 contractors
applied for certification, of which only 400-500 were solid waste contractors
in the usual context. The balance are nurserymen, landscapers, building
contractors, and others who frequently use landfills. In order to prevent
clogging up the administrative mechanisms with registration of businesses
which are not primarily solid waste collectors, the PUC has now exempted
certain classes of operation.
The question of residential versus commercial coverage is
not explicitly called out in the law so, again, free and open competition
is permitted for both types of service.
The law has several financial implications. First, the
commission has the right to require tariffs to be filed by both solid waste
collectors and landfill operators. The PUC now has the mechanism to
determine relative charges around the state and identify and analyze cases
of inordinately high rates. Comparative cost factors, financial reporting
statements, and the uniform system of accounts have not been designed
yet, so any uniform basis for rate determination is still several months
off. The legislation calls for three levels of reporting based on gross
revenue: Class I is for those having annual gross revenues of $1,000,000
or more; Class II is for firms having annual gross revenues of $250,000
to $1,000,000; and Class III is for firms having less than $250,000 of annual
gross revenues. When developed, the reporting requirements will be
strictest and the requirement for detail greatest in the largest of these
classes. The smaller firms will file relatively simplified forms.
The New Jersey PUC has not become involved in the design of
model contracts. Except for requiring a performance bond, the PUC has
had very little to do with contracts. The PUC, however, does have the
right to examine a contract between a municipality and a private contractor
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and order a reduction in rates if it feels charges are too high. The PUC
can take this action on its own initiative without any action being instigated
by either the collector or the municipality.
Before any permanent certificates of public convenience and
necessity are issued, the PUC will investigate each company. In the
interim period, they have been issuing temporary certificates. An impor-
tant part of the law is a requirement to audit every company applying for a
permanent certificate. Because of the large number of solid waste collec-
tors and shortage of auditors in the PUC and lack of a uniform system of
accounts, it appears that solid waste collectors will be operating for a
long while on the basis of temporary certification, and rates will be deter-
mined by the marketplace.
Another requirement for the PUC under the law is to monitor,
and investigate-all stock issuances, mergers, and transfers. This is
expecially important in that regulation can possibly be avoided by con-
tinuously dissolving and re-forming corporations. Also, certificates are not
transferable; therefore, new companies cannot avoid scrutiny simply by
buying someone else's certificate.
The law is silent on financing except for the surveillance of
mergers and stock issuances. For the most part, private debt and equity
financing are used among the private utilities performing collection services.
One advantage of the New Jersey system is that it provides
state-level rate regulation for situations where solid waste service
spans several geopolitical units such as cities. In municipal-level regu-
lation, they are not able to deal effectively with such inter-city or city-
county situations. An additional advantage of this system is that an audit
requirement exists. This will ensure not only the validity of the rates of
individual contractors but also the comparability of rates among all
contractors.
One disadvantage of the New Jersey system is that its provision
of free and open competition results in a large number (400-500) of firms
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which must be regulated in a single state. This will pose an awesome
administrative burden on the PUC and its staff just to process rate appli-
cations. A second disadvantage in New Jersey is that permitting completely
open competition does not allow companies to take advantage of route con-
solidation and its attendant efficiencies.
Summary
One final note concerns organizational forms which have been
established to accomplish day-to-day solid waste operations. These forms
include municipal government, private corporation, partnership, and pro-
prietorship approaches and a set of variances of these seemingly distinct
systems. In instances where franchises have been issued, intermediate
or transitional forms of organization exist, e. g. , a partnership which
evolves into a corporation, as in the case of the San Francisco firms;
a local trade association which evolved into a corporation, as in
Minneapolis; a trade association which takes an active role in regulatory
activities, as in Oregon.
At the outset of this study, it was assumed that the organizational
form of the operating unit was a critical consideration in the evaluation
of the utility concept for solid wastes. However, organizational forms
in general are of lesser importance in evaluating feasibility than most of
the major issues previously discussed. In some instances, the forms are
almost indistinguishable from each other. For example, the cooperative
form was initially viewed as an"appealing transitional form to get private
solid waste contractors together for a franchise operation. It was found
during the early stages of the study that the cooperative is embodied in
solid waste trade associations in practically all of its characteristics. It
is, and they are, groups of contractors who have banded together to share
information, to make their views known to government, and, in some
cases, to share facilities (e.g., parking garages or maintenance facilities),
and to take advantage of joint quantity discounts on purchases. However,
joint financial responsibility is not assumed by either a cooperative or a
trade association, so the cooperative form does not offer any significant
32
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advantages over trade associations. Once the group is willing to share
financial responsibility, the corporate or partnership form is most appro-
priate. As a result, the cooperative does not appear to offer unique
advantages at any organizational stage.
Thus, in summary, the case studies have illustrated a variety of
possibilities for each of the management and organization issues. First,
they have indicated that centralization, which is basically a question of
geopolitical level, can be accomplished at the city, county, region, or
state level. The persuasive arguments for having centralization close to
the operating level are tied to efficiency issues which are discussed later
in the financial section. Centralization can best be discussed along with
the regulatory and administrative issues since they are the mechanisms
for achieving centralization.
When centralization is accomplished completely within an incorporated
city, such as in Minneapolis and Tacoma, there is no need for involvement
by higher-level geopolitical units. Indeed, higher levels have no legal
right to be involved in such instances. In both of these cities, the city
government acts in the capacity of both a regulatory and administrative
body.
When centralization is accomplished at the county or regional level,
the state grants the authority to the lower-level regulatory or adminis-
trative bodies. In the case of Oregon, the state delegated the regulatory
and administrative power explicitly to the county for solid waste manage-
ment. In the case of Des Moines, the regional solid waste board has this
authority by virtue of its corporate charter.
When centralization is accomplished at the state level and is not
delegated to a lower level, the state maintains the regulatory authority,
and may or may not choose to involve itself in the details of administering
the actual operations. In New Jersey, the PUC is involved in rate regu-
lation and the DEP in environmental quality, but neither of these state
bodies is involved in administration or operations.
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Ownership and operation of the collection and disposal functions are
also key management issues. In the case of Minneapolis, ownership and
operation of residential collection was split between a large franchise to a
private company, MRI, and the public works department. Data are just
beginning to be generated over a sufficient time period to permit compari-
son between the two collection bodies. Disposal is owned and operated by
a private firm under a franchise arrangement. In Tacoma, collection and
disposal operations are owned by the city (municipal utility. Collection
is performed for both residential and commercial customers.
In the presence of county centralization with no large cities and regulation,
the city ceases to be an important entity in solid waste management. In
Oregon,, private firms own and operate the collection function and serve
residential and commercial accounts, whereas disposal ownership is split
between private firms and county government. In Des Moines, collection
is owned and operated by a quasi-public body, the Metropolitan Solid Waste
Agency. This body competes with private contractors for commercial
collection. Disposal is owned and operated exclusively by this Agency.
In the case of state-level centralization and regulation, New Jersey,
the collection and disposal functions are owned and operated by private
firms which interact with the two state regulatory bodies (PUC and DEP)
for certification and rate regulation.
The legal and financial issues will be discussed and compared in
terms of the case studies in the summaries to later sections.
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B. LEGISLATION AND LEGAL ISSUES RELATING SOLID WASTE
MANAGEMENT TO THE PUBLIC UTILITY CONCEPT
The field of solid waste management has been traditionally considered
the domain of the public health authority. As a result, the basic legal
definitions and constraints which serve to control the field relate essentially
to matters of health. Virtually every state, and most local areas, through-
out the nation have a wide variety of rules and regulations concerning the
dumping or disposal of garbage and other wastes, the burning or incineration
approach to disposing of our waste product, the handling and treatment of
dead animals or sewage waste, etc. While these regulations serve to
protect the population at large from disease and pestilence that can be
wrought from an inadequate disposed of product, relatively little legislation
and therefore control, exist in the legal, financial, or operational aspects
of solid waste collection.
In terms of collection, the most prevalent form of state or municipal
control is in the area of vehicle licensing. This approach to control is
developed primarily to afford the local political jurisdiction with simply
another source of funding to support their already overburdened taxing
system. As a result, until recently, most laws relating to licensing and
permits were revenue devices rather than a means of handling the solid
waste situation.
The emphasis in this phase of the study is to factor the legislative and
legal issues which are involved in solid waste management. Having factored
these issues, the study sought to determine the existence of laws at state levels
which address solid waste management and utility regulations. Wholly,
it is important to determine whether or not a body of legislation exists in
this field and the current state of that legislation.
1. Existing State Solid Waste Legislation
Applied Management Sciences conducted a 50 state canvass
of state level legislation using both primary and secondary sources of
information. The overall results of this canvass are shown in Figure 3
35
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LEGAL ASPECTS COVERED
Hi strlf ts
Eminent Domain ,
Licensing
Collection
Incineration
Wrecking «
Permits
Incineration
Disoosal System
PUC or other C,plpm< **<«n Control
Franchise Areas Permitted
Dumping-Garbage
Location/Fenclne
.
AL
X
AX
X
*
X
X
AZ
X
X
X
X
X
X
X
X
«
X
X
CA
X
X
X
X
X
X
CO
X
X
X
X
X
j
X
DE
X
X
DC
X
X
FL
X
X
CA
X
X
Hi
X
X
X
ID
X
X
11
X
x
IN
X
IA
X
X
BS
X
X
X
X
X
*
KY
X
X
X
LA
X
X
X
ML.
X
MD
X
X
X
X
X
X
X
MA
II
X
X
X
X
MN
X
X
x
x
X
MS
X
MO'
X
X
MT
X
X
X
NE
X
KV
X
X
X
X
NM
X
X
X
X
N'J
X
>
>:
>:
NX
X
X
X
X
NY
X
X
NC
X
X
X
x
x
«
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X
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X
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OK!
X
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X
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-
O4
3: SUMMARY OF FIFTY STATE LEGISLATION CANVASS
Reproduced from
best available copy.
-------
TPrAT. ASPFf-T<; mVFRPn (rnnHT,,,«,n
Litter and/or obstructions-.
Highways/Streets
t
Waterways
-1
*
AL
X
X
AK
X
AZ
X
X X
AR
X
X
CA
X
CO
CT
DE
DC
X
X
FL
X
X
CA
X
HI
X
,
ID
IL
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IA
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XY
LA
ME
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MI)
X
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MA
MI
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MN
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xs
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NV
X
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91
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NC
1
ND
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PA
X
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11
sc
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TN
TX
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VT
X
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VA
WA
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1
RE 3: SUMMARY OF FIFTY STATE LEGISLATION CANVASS (Continued)
Reproduced from
best available copy.
-------
; OPERATIONAL ASPECTS COVERED
' Jing Fan?
* Garbage Fjjedinjj
'- Burning Carcasses
i
pulping '
Debris/Garbaee
Nuclear Waste
Burnine/Incineration
Animals - Dead
m al
Transportation
. . Vehicles
OO
Junkvards
Sewaee Works
Garbage/Disposal Treatment
_ Wrecking
.
AL
X
AK
X
X
X
ix
X
X
AZ
X
X
X
X
X
AS
X
X
X
X
X
X
EiGURE 3: SUMMARY OF FIF'
CA
X
X
X
X
X
CO
X
CT
X
X
X
X
X
DE
X
X
X
DC
X
X
X
FL
X
X
X
Ix
X
X
X
X
X
X
I
X
CA
X
X
X
X
X
HI
*
X
X
ID
x
X
IL
X
X
IN
X
IA
X
X
X
KS
X
X
X
KY
X
X
X
X X
X
LA
ME
X
X
X
X
MD
X
X
X
X
X
X
X
IA
X
HI
X
X
X
X
X
X
MN
X
X
X
X
MS
X
X
X
X
MO
X
X
X
XT
X
X
NE
X
X
sv
X
X
X
X
X
X
NH
X
X
X
X
X
X
NJ
X
X
N*
X
X
NY
X
NC
X
X
ND
X
X
X
OH
OK
X
X
X
X
OR
X
X
X
X
PA
X
X
X
X
X
RI
X
X
X
sc
X
X
SD
X
X
TN
TX
X
X
X
X
IT
X
X
n
X
X
X
X
X
X
X
VA
X
V:A
X
X
X
wv
X
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W!
x
X
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X X
1
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wv
X
X
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4-
L
IY STATE LEGISLATION CANVASS (Continued)
Reproduced from gs|*l
best available copy. %jj(|
>
-------
FINANCIAL ASPECTS COVERED
JAL AK
AZ AR CA CO
CT DE
DC FL
CA|H: ID
IL IN
IA KS
KD |V
MI XN MS XO XT NT XV XK I N'J NX j XY
XC|ND OH|OK|ok jPA si jsc JSDJTS ITX |LT|VT|
Fees and Taxes
X IX X X
1 I I
x |xI ix x xIx
! I I I
X, 1 X X |X I I X
I X ': X ' ! X !
I I
Audits
j LI
(requirement^
Rate Regulation of charges by eov't.
! xjx|x t
1 I
! 1 t
! I
I I
I I
1 I
! ! !
URE 3: SUMMARY OF FIFTY STATE LEGISLATION CANVASS (Continued)
-------
GLOSSARY OF LEGAL TERMS AS USED IN SUMMARY
OF FIFTY STATE LEGISLATION CANVASS
Legal Aspects Covered
Contracts for Garbage
Collection/Disposal
Districts
Eminent Domain
Licensing
Permits
PUC or Other Commission
Franchise Areas Permitted
Location/ Fencing
Litter and/or Obstructions
The state or its counties have the
power to contract for the removal or
disposal of solid wastes .
States have the power to create
sanitary districts.
The states possess the power of
eminent domain in regard to
solid waste matters.
Specific licenses are required for the
collection and disposal of solid waste,
the operation of dumps and the
wrecking of vehicles.
Permits are necessary for the
operation of incineration or other
disposal systems.
Control of solid waste activities
is under the Public Utility Commission;
the Public Service Commission; or
some other Board of Commissioners,
such as County Commissioners.
Franchise areas for solid waste
activities are permitted by law.
Regulations exist that deal with the
location of dumps and the necessity
of fencing to prohibit wind-blown litter.
Regulations exist governing littering or
obstructing highways, streets, waterways
and railroads.
40
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Operational Aspects Covered
Hog Farm
Dumping
Burning/Incineration
Animals - Dead
Vehicles
Spitting Foods
Junk Yards
Sewage Works
Wrecking
Financial Aspects Covered
Fees and Taxes
Audit (Required)
Rate Regulation of Charges
by Government
Regulations relating to the feeding of
raw garbage to hogs and the burning
of their carcasses exist. There are
also regulations pertaining to hog
cholera.
Regulations exist governing the dumping
of debris, and garbage, as well as the
disposal of nuclear wastes.
Regulations governing the operational
aspects of burning and incineration
of solid waste exist.
Regulations governing the disposal and
transportation of dead animals exist.
Regulation governing the type of
vehicles to be used exist.
Regulations governing the spitting of
solid waste exist.
Regulations governing the operation of
junk yards, such as acceptance of
vehicles for junking and concerning the
sightliness of the junk yard.
The operation of sewage works is
governed by regulations.
The activity is governed by State
Laws.
There are specific fees and taxes on
solid waste operations.
An audit of solid waste companies
is required by law.
Some governmental unit within the
state can regulate the charges for
solid waste services.
41
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NOTE;
These surveys are not complete in the sense that all laws pertaining
to solid waste have been examined. For example, a state may have very
strict air and water pollution laws. While these are primarily concerned
with the quality of air and water, high cleaner standards force the closing
of incinerators and waste, purification standards prohibit the location of
landfills where there are underground streams. Similarly, rules governing
the littering of highways and the use of trucks.may be in a Highway
Safety Act, although there is great impact on the solid waste industry.
Another example is the power of eminent domain. A limited number of
states possess this power explicity in solid waste legislation yet all states
possess the power of eminent domain.
42
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according to selective legislative categories as covered in each of the
50 states. Following Figure 3 is a definition of each category. While
many states have laws concerning various aspects of solid waste management,
most legislation is no longer responsive to the present day requirements
of the field. Based on our understanding in solid waste management, we
have, therefore, disregarded a considerable amount of legislation in this
analysis. Rather, our analysis has sought to determine the extent to which
legislation existed in states which would be useful in the development of
public utility concept in solid waste management. The basic forms of
legal authority we have defined as providing input into a public utility
structure, include consideration such as:
PUC or other Commission - control of solid waste activities
under the PUC, the public service commission, or some other
form of commission, such as a county commission
Sanitary District - States having the power to create sanitary
districts
Licensing - Legislation which develops specific licenses
required for the collection and disposal of solid waste.
Franchise Areas - State control of franchise areas for solid
waste activities, and state designation thereof
Eminent Domain - The states possess the power of eminent
domain in regard to solid waste matters
Audit Requirements - The audit of solid waste studies is
required by law by the state
Rate -Regulation - Some governmental unit within the state
can regulate the charges for solid waste services.
A large number of states have one or more of the aforementioned authorities.
For example, district designation is controlled at the state level by 17 states.
PUC or other commission control exists in 16 states; franchise areas in
8 states, and eminent domain in 12 states. Financial control in the form of
audits are within the authorization of four states, and rate regulation of
charges by government occurs in ten states. Figure 4 is a table designed
to illustrate the key word definition of the state authority and a comprehensive
listing of those states having specific public utility related authorities in the
field of solid waste management.
43
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**^"*"- "!!
Authorities
State or County Regulatory
Board Involvement in Solid
Wastes
Audit Requirement*
Rate Regulation
Franchise Areas
.Licensing or Certification
Eminent Domain
Sanitary District*
AriEona
X
X
X
California
,
X
*
Colorado
X
X
X
X
X
Hawaii
X
Maryland
X
X
X
X
Montana
X
±
Jersey
X
X
X
X
North
Carolina
X
X
X
X
X
Oklahoma
X
4
Or«|on
X
X
X
X
RhYd*
Island
X
X
X
X
South
Carolina
X
Texas
X
*
Washington
X
X
X
X
.1
Virtinia
X
X
X
Wisconsin
X
~ X
X
FIGURE 4l STATES WITH REGULATORY AUTHORITY IN SOLID WASTE
Reproduced from
best available copy.
-------
The sixteen states having a state or county level regulatory
board are shown in Figure 4 arrayed against the previously discussed
seven classes of authority. These seven classes are arranged in descending
order of importance on the chart. Among the sixteen states six have the
most complete coverage, these six being Colorado, New Jersey, North Carolina,
Oregon, Rhode Island, and Washington. In addition, a seventh state, West
Virginia in discussed since it has documented precedents of solid waste
rate regulation.
Colorado
The Colorado law, augmented by a recent PUC decision, provides
for an increasing level of regulation of the solid waste industry. Common
carriers of ashes, trash, waste, rubbish, and garbage are required to
obtain a Certificate of Public Convenience and Necessity and file a tariff.
Rate prescription is now being evaluated pending the development of a uniform
system of accounts. An audit requirement is part of the regulatory process
now being developed for this industry.
A somewhat unique feature is that carriers are being issued
Certificates for particular limited areas of operation. Within each of these
areas a set of contractors is permitted to operate. Even though it is not
an exclusive franchise, it does represent a limitation on competition within
an area. A further requirement is mandatory service within each of these
areas. If a person were not receiving service, the PUC could require one
of the licensees in that area to provide service.
New Jersey
As stated previously. New Jersey represents landmark legislation
in the completeness of coverage of the solid waste problem. In particular,
this law provides for a dual responsibility between the PUC and the state
EPA, the former for rate regulation and the latter for environmental pro-
tection and health. Certification of collectors is required in the law. In
fact, this requirement had to be more carefully defined since originally
45
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over 2000 firms using disposal sites were certified, only 400-500 of which
were bona fide solid waste collectors. Rate regulation will eventually be
a requirement, once a uniform system of accounts and the rate regulation
mechanism is set up for this industry. An audit requirement is also a
part of this law with detail of accounting required divided into three size
classes: under $250, 000 gross revenues, between $250, 000 and $1, 000, 000,
and over $1, 000, 000. Finally, a key characteristic of the New Jersey law
is completely free and open competition with no barrier to entry into the
field. The net result of this is a large number of firms to be regulated.
North Carolina
The regulatory level in North Carolina is the Board of County
Commissioners which has the authority to issue licenses and prohibit
collection by unlicensed operators. The board may also regulate rates
although no audit requirement exists. It may also grant the exclusive rights
to collect and/or dispose of garbage within a specified (franchised) area.
In addition, the board may operate collection and disposal facilities in un-
corporated areas, which implies far-reaching operational authority not
usually vested in a regulatory board. Finally,, it has the clear right of
eminent domain for all vacant land in the county.
Oregon
Oregon is similar to North Carolina in that it has vested regulatory
powers in county boards set up for this purpose. Moreover, they have given
these boards rate regulation power, although they too have stopped short of
an audit requirement. These boards also have certification powers and the
authority to establish franchise districts by re-allocating existing routes.
In this regard, they have proceeded further than North Carolina into formal
county operating plans in Clackamas and Marion counties and 50 operating
franchises in a total of 16 counties, to date. In total, 34 counties have
agreed to follow the same pattern.
46
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Rhode Island
In a new amendment (July, 1971) to the existing state utility
law, Rhode Island established PUC authority over solid waste management.
Initial certification of all collectors is to be done by a joint commission
composed of the Director of Health, Director of Transportation, and Director
of Business Regulation. Thereafter, such certificates will be granted by
the PUC. This law provides for franchising in the form of recognizing
"grandfather" situations, (e. g. , a certificate will not be issued in a town
in which another public utility is at that time furnishing its service. This
is different from the Oregon situation, in that no attempt will be made to
re-organize the existing condition, but only to recognize it. The PUC may
issue a single certificate in any town it deems necessary. Rate regulation
will be conducted by the PUC, however, no audit requirement is explicitly
called out.
Washington
The Washington Utilities and Transportation Commission has
had legal authority to regulate refuse collectors at least since 1962. They
issue certificates of convenience and necessity to qualified collectors and
regulate their rates. They have a uniform system of accounts for this
purpose. However, they do not have jurisdiction over municipal utilities
(such as in Tacoma) or over large franchises within municipalities (such
as Seattle). In order to facilitate this regulation, the state has established
solid waste districts.
West Virginia
West Virginia vests the authority for regulating solid waste
management with County Courts in the legislation, but in practice, the
Public Service Commission regulates the rates. The PSC has reviewed
financial data of refuse companies and passed judgement on their rate
applications. In one case, they began by developing operating ratios and
indicated that his proposed operating ratio of 91 percent was within the
47
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range for the transportation industry (87%-96%), but finally compromised
on rates which presumably would result in a higher operating ratio. This
simply indicates a precedent for such rate regulation by a PSC. Eminent
domain is vested in the County Courts as is the more sweeping authority
to own and operate collection and disposal functions. To date, this latter
authority has not been invoked.
2. Competition
Economic theory ascribes many benefits to the role of free and
open competition. Some of these benefits are the achievement of stipply-
demand equilibrium, price stability at equilibrium, and consequently, the
supply of a service in adequate quantity at a fair price. Under some condi-
tions, such as the supply of a needed public service, free and open compe-
tition may not make sense. The public service may be required by health x
codes, as in the case of solid waste collection, or as a result of a needed
elimination of duplicative investment to cover the same area, as in the case
of gas and electric. Since competition is such an important consideration,
and has financial and operation ramifications as well as legal, it was examined
closely in both the theoretical and solid waste contexts.
First, in the theoretical context, it was useful to examine the
classical conditions which dictate the necessity for a monopoly or oligopoly.
Our free market system assumes free competition as the best alternative,
and the burden of- proof lies on establishing a need for a monopoly condition.
A monopoly exists when one supplier controls the supply of a commodity or
service. Often the public interest requires the establishment of a monopoly
in order to best serve the public. Generally, .a monopoly requires govern-
ment regulation so that it may not use its unique status to artificially raise
the price by restricting output and creating an artificial scarcity. Economic
theory has proven that for a firm operating under perfect competition the
greatest profits are obtained when the firm produces the quantity indicated
by the intersection of the marginal revenue and marginal cost schedules.
A monopoly, however, faces a different situation. It can increase profits
more by restricting output and raising the price.
48
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Traditionally, monopolies exist or are created when certain
conditions prohibit the free market from working under the conditions of
free competition or the public interest is best served by a limitation on
competition. One situation in which a monopoly is preferred is where
the existence of competition would be detrimental to the public interest.
An example is the telephone industry where the existence of many companies
would result in a proliferation of telephones, phone lines, and equipment,
and in a duplication of service. In order to have adequate service, a party
might require numerous telephones so that he could contact a party served
by another company. Another situation which tends to favor the existence
of a monopoly is the case where firms are not practically free to enter
the market because of long lead-time capital requirements. Electric power
and gas companies are monopolies because the large capital outlays and
the long lead time to construct facilities effectively limit competition. In
cases where competition would lead to public inconvenience, a monopoly
can also be justified.
Another situation where a monopoly is necessary exists where
intense competition among competitors threatens the stability of the industry.
The competition among railroad companies toward the end of the nineteenth
century is an example of this. When competing railroads had lines going
to the same city, the railroads would charge extremely low rates in order
to "steal" business from a competitor. Often the rates charged were below
the costs of service. This meant, among other things, that the railroads
were losing money and therefore attempting to cut costs by not maintaining
their equipment adequately. Each railroad hoped to last long enough to
bankrupt its competitors. If a company could force its competitors into
bankruptcy, it would then be able to charge "what the traffic will bear. "
It was often cheaper to ship goods long distances on competitive routes
than short distances where only one company was providing service.
See Phillips, Charles F. , "The Economics of Regulation"; publisher,
Richard D. Irwin, Inc., 1969, p. 19.
49
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In summary, three conditions requiring monopoly are: public
convenience and necessity, redundance of capital outlay to provide service,
and excessive competition threatening the industry. The characteristics
of free and open competition are: free entrance into and exit from the
market, no control on quantity, price, or quality of service, and no control
over number of competing firms.
In solid waste management, free and open competition now
exists in most cities in the commercial business market, and in many
cities in the residential market. At this end of the "competition spectrum, "
contractors literally compete in large numbers for the business, using
both price and quantity of service, and many firms enter and leave the
marketplace every year (5% nationally enter and 4% leave each year )<
Among those who remain in business, fierce competition exists in some
areas which may drive prices down below the break-even level and may
result in contract default, interrupted service, and high turnover among
the smaller companies. In fact, the previous existence of such a condi-
tion in Denver led to industry support of franchising areas and the filing
of tariffs. Also, in many small metropolitan areas, such as Billings,
Montana, competition for the relatively new and growing solid waste market
has resulted in drastic price cutting. The situation in New Jersey, even
with the new legislation, is one of uncontrolled numbers of contractors,
and a very highly competitive situation.
At the opposite end of the "competition spectrum" are municipal
monopolies where the city, or a municipal Department of Public Works
utility, has complete authority over residential and commercial collection
and disposal. The practical problem with such municipal arrangements,
in the absence of rate and rate of return regulation, is that there is no
positive force to ensure good management practices and efficiencies of
operation. Traditionally, regulation has normally awarded utilities for
such characteristics. Unregulated municipal operations, in many cases,
Applied Management Sciences study of the private sector, performed for
NSWMA, in progress at this writing.
50
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perpetuate excessive labor pools (as in Atlanta)-' due to the existing attitude
toward over staffing, or allow inequitable cost allocations (as in Sarasota and
Tacoma) among functions within the Sanitation Department
Between these two extremes are cities and counties which
employ some form of control on the number of competitors, and therefore
create an oligopoly situation. In these instances, franchising is a key
part of limiting the number of companies. This is usually done with either
city, county, or state level certification, selection of franchisee, and rate
regulation. In these franchise situations, competition is permitted in three
dimensions: number of franchises, duration of franchises, and tvr>e of
* * *.
service covered. In Minneapolis, MRI has a five-year franchise and is
made up of 52 smaller companies for residential service. Open competi-
tion still exists for commercial service. In Oregon, county-level regula-
tory boards determine franchises for all service for ten years. There
are already over 50 such franchises. In Seattle, which is not analyzed in
detail in this report, there are two franchises for residential service for
a duration of five years, with municipal-level regulation. In Rhode Island,
franchises are being awarded for entire towns for 'residential and com-
mercial service, under PUC regulation. In many communities and sub-
divisions around Washington, D.C., one and two year franchises are
issued by citizen's groups or other forms of community government. There
are literally dozens of variations of the franchise concept, but all have in
common the three basic limiting characteristics: oligopoly, periodic
renewal and rate review, and specification of class and type of service.
In summary, there is a full range of possibilities for solid
waste management with respect to the competition issue, and legal
precedent exists for each one of them. Looking back at the classical
conditions for monopoly, a case can be made for public convenience and
necessity and for reducing redundant capital outlay, although not as strong
a case for the latter condition as in more capital-intensive industries. As
far as severe competition threatening the solid waste industry, it has not
yet reached that point in most cities, although it frequently disrupts
'Applied Management Sciences' case studies of eight cities, in progress
at this writing.
51
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otherwise smooth performance of service. A more compelling reason for
the limitation of competition lies in the potential efficiencies of such limi-
tation. However, simple limitation on entry does not achieve these
efficiencies since route consolidation is the key to these efficiencies. There-
fore, a special type of oligopoly, such as the issuance of exclusive franchises,
appears to strike the necessary balance between completely free and open
competition and monopoly.
3. Role of State, County, and Municipal Agencies
Among public bodies, counties and municipalities will have an
important role to play in any comprehensive law that deals with solid waste
management. Counties and municipalities are the levels of government
which are nearest to the actual solid waste operations and which are most
familiar with the daily problems that arise in the solid waste management
field. The lower-level political units are, hopefully, more in touch with
the requirements and problems of the people than the higher units such as
states or regional authorities.
Compared with state bodies, counties and municipalities will
play their strongest role in solid waste operations. It is they who are
familiar and knowledgeable with local geography, housing patterns,
traffic patterns, industrial locations, and other unique features of their
areas. It is through their county and municipal government that citizens can
directly express their favor or disfavor of current policies.
In most cases, the municipality is either the operator or the
administrator of the solid waste management system. In addition, it is the
collector of real estate and other taxes which are the source of operating revenues
for solid waste in the absence of user charges. This means that any state
legislation must be compatible with city ordinances in order to be effective.
A reference list of city ordinances is shown in Appendix E.
The county is normally the site of the landfill and therefore the
recipient of the waste. Moreover, the county has a unique collection prob-
lem since it is most often spread out, newly developed, and requires
52
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collection with long distances between stops. State laws must also deal
with these unique county problems.
Each state possesses the right of eminent domain by virtue of
its constitutional rights. Other political units such as counties and incor-
porated areas such as cities often have this power. In most states, the
right of eminent domain is not held by the unit responsible for planning
and maintaining solid waste management activities. New Jersey is a
prime example. For example, in New Jersey the State Department of
Environmental Protection (DEP) must issue licenses to all sanitary
landfills and disposal sites. However, it cannot condemn land, except
for demonstration purposes. The power of eminent domain lies with the
counties whose legislation concerning solid -waste management has been
superseded by the state. Counties in New Jersey now possess very little
real power in solid waste management; however, the counties still possess
the right of eminent domain.
Currently, only a limited number of states make use of the
power of eminent domain at the state level for solid waste management
purposes. This probably stems from the fact that most states do not have
comprehensive laws governing solid waste management. Presently, we
find the power of eminent domain located at the county level or with incor-
porated areas and cities. In many areas, this power is used only with
extreme caution since the location of any type of solid waste facility such
as a garage, transfer station, or landfill is nearly always opposed by
affected area residents.
"Finally, the specific right of eminent domain has been
given to most regulated industries. (The exceptions are
the airlines, motor carrier, and water carrier industries,
and coal slurry pipeline companies.) This right enables
them to condemn private property and take it for "public
use" when necessary to the proper conduct of their business.
The regulated industries are required to pay a just compen-
sation for any property so condemned. Land may be taken,
for instance, for electric or telephone pole lines or for
water mains, to enable a regulated company to provide
adequate service for the public. "_/
'Phillips, Charles F. , Jr., "The Economics of Regulation", published
by Richard D. Irwin, Inc., 1969.
53
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Therefore, there is precedent for utilities having this right, in addition
to government's possession of the right.
Summary
In summary, there are many legal aspects of solid waste manage-
ment for which precedents exist. Some of the more common of these are
State or County Regulatory Board involvement in solid waste, certification
of solid waste contractors, rate and rate of return regulation, and the
establishment of sanitary districts. However, it is the unique approaches
which bear discussion in summarizing this section of the report.
In New Jersey, for example, the Public Utility Commission has the
right to set a ceiling on rates in order to prevent excesses in rate charges
in this industry. Conversely, in Colorado, a recent order of the Regulatory
Commission indicates interest in rate prescription which may be accom-
panied by a rate floor in order to avoid the opposite problem of price
cutting and excessive price competition. Oregon has delegated the rate
regulating authority for solid waste management to the County Boards, while
West Virginia has attempted to develop operating ratios for rate setting
similar to those used in the motor transport industry. It is clear from
this information that wide boundaries are defined in the precedents for
approaches to rate regulation.
Similarly, a wide variety of precedents exist for franchising. They
range from county-level franchising of solid waste areas to private con-
tractors, which is done in Oregon, to a less specific franchising authority
given by the Rhode Island PUC to towns and villages. In this latter case,
the PUC has the right to issue a franchise for exclusive service in any
town or village to a private contractor. This is something that they have
not exercised to a great extent, as of this writing, but nonetheless is a
legal precedent.
In Colorado, still another franchise approach exists which certifies
collectors in a solid waste area but not with exclusive right to collect in
that area. That is, more than one collector is granted the right to collect
solid waste so that it is really a form of controlled competition within an
area.
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Still another area in which a broad spectrum of precedents exist is
that of audit requirements. In the State of West Virginia, private contrac-
tors are subject to audit whenever they submit an application for rate
increase to the Public Utilities Commission. This permits the PUC to
analyze not only their rates but also the rate of return and to make a judgment
regarding how equitable both are. In West Virginia, this is an ongoing
process so that not only does it provide legal precedent but also a history
of implementation. The same can be said for the State of Washington
in which a requirement for audit in this field has been in existence for
quite some time. In the States of Colorado, New Jersey, and Rhode Island,
the audit requirement is part of the legislation and accompanying PUC
decisions. However, either from a lack of uniform system of accounting
or from other practical problems, implementation has not been completed as
yet in these states. Finally, in Oregon, rate regulation proceeds without
any audit requirement but rather a simple judgmental test of reasonable-
ness is applied on the part of the County Solid Waste Regulatory Board.
It is clear from the analyses performed in this section that a wide
scope of precedents exist in all of the important aspects of solid waste
regulation. Thus, any state or county which was formulating new legisla-
tion or executive directives in this area could call upon a wide variety of
legal precedents elsewhere in order to be on firm legal ground. This
serves to further illustrate the breadth of the public utility concept in
terms of the number of forms that it may take and the ways in which it
may be applied.
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C. FINANCE
This section encompasses the financial considerations involved in
solid waste management and the regulation thereof. Three basic topics
are methods of generating operating funds, including user charges; rate
determination and rate regulation; and capital financing. Within the first
of these are various philosophies of raising operating funds through direct
and indirect means. The second topic describes the issues involved in
determining rates and profits on a comparable basis, determining a fair
rate of return, and regulating rates. The final topic addresses methods
of capital financing available and those most commonly used in this
industry.
1. . Methods of Generating Operating Funds
It is important, at the outset, to define terms carefully
because of the potential confusion. For the purposes of this research,
there are three basic methods of generating operating funds:
Tax Levies - revenues raised from real estate or other taxes
and budgeted for solid waste management. These may or may
not show up as a separate line item on the tax bill.
Fixed Charges - revenues generated from a fixed charge
which, in a municipally controlled operation, is separate
from taxes, but which does not reflect level or type of
service. An example of a fixed charge for a municipal
system would be a flat rate charged for residential service
which appears on everyone's water bill. Similarly, many
private contractors charge a fixed rate for collection
service.
User Charge - a variable charge which varies according to
the level of service rendered.
Individuals contracting directly with private contractors pay a
direct service charge for the removal of solid wastes which may be either
a fixed charge or a user charge. Municipalities or other governmental
authorities providing solid waste management services can fund their
operations in any of the three basic ways. Funds raised from tax levies
can be assigned to this operation directly from the general fund or munici-
pal treasury, fixed charges may be imposed, or user charges may be
56
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imposed upon the user of services according to his consumption of the
services. Within the general definition of user charges are many classes
of charges for various types of service which will be discussed later in
this section.
One advantage of both fixed charges and user charges over
tax levies which do not specially call out solid waste charges is that they
generate separate "solid waste" revenues. Then, the solid waste organi-
zation does not have to compete with other municipal operations within
the city for appropriations from the general tax fund. In cities which use
tax levies to finance solid waste operations, the solid waste manage-
ment budget is subject to the normal budgetary process and might be cut--
without regard to the actual operating costs of that function.
Another advantage of both fixed charges and user charges is
that they force the solid waste operation to be run as a business and
increases the visibility of operating efficiencies. When operating funds
are appropriated from the general fund, there is no "income" as such,
and it is extremely difficult to determine the operating efficiency of the
solid waste system. When the solid waste operation receives income
from an identifiable source such as fixed or user charges and is forced
to meet expenditures from such income, any profits or deficits can be
determined and measures of efficiency can be developed. Services pro-
vided for other agencies are explicitly stated. For example, if the refuse
maintenance facility is used by other agencies, charges for this service
become income (or diminished expenses) of the refuse agency.
Another advantage of fixed and user charges over tax levies
is that they make it easier to develop a case for a rate increase when
needed by providing "profit and loss" visibility into financial management.
The solid waste operation can visibly demonstrate the need for a rate
increase if the revenue and costs have been compiled. The city manager
or city council would then have to decide whether to increase user charges
or subsidize the operations with monies from the general fund. Rec6g-
nizing that most cities are strapped for funds, it would be expected that
57
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rate increases would be preferred to a subsidy from the general fund
that is already inadequate to meet all demands put upon it, unless political
expediency dictated otherwise.
A case for user charges can also be made on the basis of
"equity" or fairness. When solid waste operations are financed from the
general fund, this means that all taxpayers are paying for solid waste
management services even though they may not be receiving services.
For example, in Minneapolis, commercial customers were subject to a
tax increase for solid waste management, but they do not benefit at all
from the city services. User charges force the beneficiaries of service
to pay directly for that service.
One final benefit of fixed charges or user charges for municipal
systems is the ability to float revenue bonds that their use permits. Basi-
cally, revenue bonds are bonds whose interest and principal are ultimately
paid back from the revenues of the authority issuing the bonds, not the
general fund of the municipality. Moreover, the revenues of the operation
are pledged as collateral for the issue. In effect, holders of revenue
bonds are creditors of the issuing authority. Revenue bonds possess two
large advantages as compared to general obligation bonds. In the first
place, revenue bonds generally carry a lower rate of interest than general
obligation bonds. The second advantage of revenue bonds is that they
do not count towards the fulfillment of municipalities' legal debt limit.
Also, revenue bonds do not need the approval of the electorate to be issued.
In this era of fiscal conservatism, taxpayers have been refusing general
obligation bond issues for such items as schools and roads. Bond issues
for solid waste management might meet the same fate.
A practical shortcoming of revenue bonds is that they are only
acceptable for a period equal to or less than the life of the equipment being
financed by them. Trucks with a life expectancy of five years cannot be
financed with 15- to 30-year bonds. More discussion of this subject
appears under the "capital financing" section.
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The question of user charges is one which may be viewed in
classical utility parlance in terms of "rate classes." For example, in
solid waste, there are two major rate classes: Residential and Com-
mercial. Within each of these are sub-classes. For example, within
residential, there are sub-classes related to frequency of pickup and
point of pickup. Within commercial, there are sub-classes related to
frequency of pickup and size of container. An example of one of the most
elaborate schedules of rates for residential collection is shown in the
table below.
Residential Class Rales (Example from Tacoma)
Distance for
Pickup
Basic Charge
0-25 ft.
26-75 ft.
76-120 ft.
121-200 ft.
Once /Week Service
Cost /Month
$1. 75 - 1st can
0. 85 - ea. extra
$2. 65 - 1st can
1. 80 - ea. extra
$3. 55 - 1st can
2. 70 - ea. extra
$4. 50 - 1st can
3. 65 - ea. extra
Flights of
Sta i r s
$1. 00 /flight
$1.00 /flight
$1. 00 /flight
$1. 00 /flight
A similar schedule of monthly charges for commercial
collection is shown in the next table.
Commercial Class Rates (Example from Atlanta)
Cost/Month
Container
Size (cu. yd. )
4
5
6
8
' Frequency of Pickup
1
$20. 80
26. 00
29.83
38. 13
2
$41. 60
52.00
59.80
76.27
3
' $ 62.40
78.00
89.70
114.40
4
$ 83.20
104. 00
121. 10
152.53
5
$104. 00
130. 00
149.50
190. 67
6
$124. 80
156.00
179.40
228. 80
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2. Rate Determination and Rate Regulation
Rate determination is developed in much the same way as
prices are determined in a well-run business. All cost elements are
developed and analyzed. The major cost elements are direct labor,
indirect labor, supplies and equipment (including depreciation), and
general and administrative (or overhead). A complete and detailed break-
down for this industry is shown in section a_ below. These costs are then
divided by units of service provided (e.g. , residential stops) in a speci-
fied time period (e. g. , one month) to determine the investment, operating,
and maintenance costs per unit (e. g. , cost per stop per month).
Once unit costs have been determined, the next component
of rates is rate of return, and an entire section of the report is
devoted to the development of a fair rate of return. Rates for any class
of service then are "burdened" unit costs for that service (including over-
head) plus the profit margin, or rate of return. One final consideration
where there is an element of competition is the price level the market
will bear, since rates above current market level make no sense, regard-
less of how carefully they were derived.
Currently, rates are determined in the private sector according
to their costs, their expected rate of return, and what the market (and
competition) will bear. Rate regulation in these instances is left to the
marketplace. In some instances, this works out well and in others there
are excesses in both extremes. Where rates are too high, true competi-
tion does not exist and customers are being excessively charged. At the
other extreme, rates that are too low allow "buy-ins" by incompetent
firms with contract default and interruption in service. Rate determination
should follow the same steps as any regulated firm pursues in preparing
an application for an increase in rates.
a. Development of Uniform System of Accounts
It is extremely difficult, if not impossible, to compare
financial statements among firms unless they use similar or identical
accounting practices. Such a uniform system of accounts for solid waste
60
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management has been developed as part of this study using knowledge of the
accounting practices in this industry, the peculiarities of the industry, and
upon the approaches taken in several states which have attempted to set up
such systems for rate regulation or other purposes. The uniform system
which has been developed appears as Figure 5 over the next 15 pages.
The uniform system appears in four parts: Consolidated
Profit and Loss Statement, Profit and Loss Statement, Distribution of
Operating Expense, and Comparative Balance Sheet. The first three are
presented in increasing order of detail. The first table shows consolidated
figures for a general overview of the operation. The second of these tables,
labeled "PROFIT AND LOSS STATEMENT, " shows operating revenues
broken down into residential service, various types of commercial service,
special service, and disposal. This permits a fine enough breakdown to
separate commercial revenues from residential since they represent
separate classes of revenue for regulator purposes.
Operating expenses are broken down the same way to
permit the determination of prices based on separate commercial and
residential costs. Also, if regulation were to be on rate-of-return for
specific class of service, this breakdown would permit "pairing" of com-
mercial revenues with commercial expenses (plus a proportionate amount
of overhead) to determine "commercial profit. " The same could be done
to determine "residential profit."
One problem in classification, which was overcome in
part, dealt with the confusion which exists when a single vehicle collects
both commercial and residential refuse and cannot be neatly classified
into one or the other category. This occurs both on primarily residential
routes and on primarily commercial routes, where routing convenience
dictates that a single truck pick up both types of customer. This was
overcome, in part, by breaking out containerized commercial expenses
from other commercial service. The containerized commercial expense
is clearly commercial , so the category of possible confusion has been
Commercial includes apartments over four-plex, retail stores, manu-
facturing plants, etc.
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FIGURE 5
CONSOLIDATED PROFIT AND LOSS STATEMENT
OPERATING REVENUES
Residential Service $,
Comm. Service - Containers
Comm. Service - Other
Municipal and Public Service
Special Service
Waste Material Sales
Disposal Charges
Total Operating Revenue $.
OPERATING EXPENSES
Collection $
Disposal
Total Operating Expense
Operating Income _$_.
General Office $
Net Operating Income _$_.
MISCELLANEOUS REVENUE
Interest Revenue J
Other Miscellaneous Revenue
Total Miscellaneous Revenue
MISCELLANEOUS EXPENSE
Interest Expense $
Other Miscellaneous Expense
Total Miscellaneous Expense $.
Net Income Before Income Taxes $.
Provision For Income Taxes
Net Income (or Loss) $.
62
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FIGURE 5 (Continued)
Miscellaneous Expense
Interest Expense $.
Other Miscellaneous Expense _.
Total Miscellaneous Expense
NET INCOME BEFORE INCOME
TAXES $.
Provision for Income Taxes __.
NET INCOME (LOSS)
63
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FIGURE 5 (Continued)
DETAILED PROFIT AND LOSS STATEMENT
OPERATING REVENUES
Residential Service $.
Comm. Service - Containers
Comm. Service - Other
Municipal and Public Service
Special Service
Waste Material Sales
Disposal Charges .
Total Operating Revenues $.
OPERATING EXPENSES
Residential Service
Collection $
Disposal
Total Residential Service Exp.
Comm. Service - Containers
Collection $.
Disposal
Total Comm. Service - Containers
Comm. Service - Other
Collection $.
Disposal
Total Comm. Service - Other ,$.
Municipal and Public Service
Collection $.
Disposal
Total Municipal and Pub. Serv.
Special Services
Collection $
Disposal
Total Special Services _$_.
Operating Expenses :
General Office Expenses jfcj
NET OPERATING INCOME
Miscellaneous Revenue
Interest Revenue $ ......
Other Miscellaneous Revenue ......
Total Miscellaneous Revenue $
64
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FIGURE 5 (Continued)
Definition of accounts in Profit and Loss Statement:
OPERATING REVENUES
RESIDENTIAL SERVICE
Credit to this account all revenues derived from the collection of
refuse from private dwellings, occupied and used as homes or resi-
dences of individuals or families for regular collection service.
COMMERCIAL SERVICE--CONTAINERS
Credit to this account all revenues derived from the containerized
collection of garbage and refuse from apartment houses, hotels,
clubs, places of worship, restaurants, boarding houses, eating
places, shops and places of business for regular collection service.
COMMERCIAL SERVICE--OTHER
Credit to this account all revenues derived from the non-containerized
collection of garbage and refuse from apartment houses, hotels, clubs,
places of worship, restaurants, boarding houses, eating places, shops
and places of business for regular collection service.
MUNICIPAL AND PUBLIC SERVICE
Credit to this account all revenues derived from the collection of
refuse from all municipal buildings and property.
Credit to this account all revenues derived from the collection of
refuse from all civil divisions of government such as municipal,
federal, state, county government installations; school, power, park
and port districts, etc.
SPECIAL SERVICES
Credit to this account all revenues derived from the removal and
disposal of dead animals, cleaning of vaults, tanks and cesspools,
the removal of brush, grass, weeds, rubbish and miscellaneous
debris.
Credit to this account all revenues derived from the collection of
all refuse from regular services both commercial and residential,
which exceeds in quantity the amount of refuse covered by the regular
monthly rate therefor.
65
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FIGURE 5 (Continued)
WASTE MATERIAL SALES
Credit to this account all revenues received from the sale of waste
materials such as paper, glass, and metals.
DISPOSAL CHARGES
Credit to this account all revenues received from the use of dis-
posal facilities by other persons, firms, and governmental units.
PENALTY CHARGES
Credit to this account all assessments of penalties for delinquency
in payment of accounts.
OPERATING EXPENSE
COLLECTION
Charge to this account all expenses incurred in the collection of
solid wastes such as salary and wages, fuel, insurance, depreciation,
printing, maps, and all other expenses incidental thereto.
DISPOSAL
Charge to this account all expenses incurred in the disposal of
solid wastes such as salary and wages, fuel, insurance, depreciation,
printing, and all other expenses incidental thereto.
GENERAL OFFICE
Charge to this account all general office expenses that cannot be
allocated to either collection or disposal.
INTEREST REVENUE
This account shall include all interest revenues accrued or received
on investments, loans, bank deposits, or other sources.
INTEREST EXPENSE
Charge to this account each month the monthly proportion of
interest accrued on outstanding bonds.
OTHER MISCELLANEOUS REVENUE
Credit to this account all miscellaneous and non-operating revenues
not provided for elsewhere, such as work performed for others or com-
pensation for materials and supplies furnished to others.
66
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FIGURE 5 (Continued)
OTHER MISCELLANEOUS EXPENSES
Charge to this account all miscellaneous and non-operating expenses
not provided for elsewhere, such as the cost of work performed for
others, or materials and supplies furnished for others.
67
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FIGURE 5 (Continued)
DISTRIBUTION OF OPERATING EXPENSE
For the Year Ended
Current Previous Increase or (Decrease)
Year Year Dollars Percent
REFUSE COLLECTION
Residential Service Expense
Wages and Salary Expense
Supervisors $ $.
Drivers
Helpers ...... __.
Total Wage and Salary Expense
Vehicle Operations Expense
Gas and Oil $ $.
Tires and Batteries
Equipment
Depreciation
Total Equipment Operations Expense $_.
Vehicle Maintenance Expense
Parts . $ ...... $.
Direct Labor ......
Supervisory Labor
_
Total Equipment Maintenance Expense $
Other Equipment Expense
Equipment - Rental /Depreciation $ ...... $
Containers - Rental /Depreciation ......
Garage .......
Insurance ......
Other ._I^_L
.
Total Other Equipment Expense $
Total Residential Service Expense $ ...... _$.
-------
FIGURE 5 (Continued)
Commercial Service--Containers
Current Previous Increase or {Decrease)
Year Year Dollars Percent
Wages and Salary Expense
Supervisors . $ $.
Drivers
Helpers .
Total Wages and Salary Expense $ $_,
Vehicle Operations Expense
Gas and Oil $ $.
Tires and Batteries
Equipment
Depreciation
Total Equipment Operations Expense $ 7 T]
Vehicle Maintenance Expense
Parts $ $.
Direct Labor
Supervisory Labor
Total Equipment Maintenance Expense $ 7 JT
Other Equipment Expense
Equipment - Rental/Depreciation $ $.
Containers - Rental/Depreciation
Garage
Insurance
Other
Total Other Equipment Expense
Total Commercial Service Exp. Cont.
Commercial Service Expense - Non Containerized
Wages and Salary Expense
Supervisors $ $.
Drivers
Helpers
Total Wages and Salary Expense $ $.
-------
FIGURE 5 (Continued)
-j
o
Vehicle Operations Expense
Gas and Oil
Tires and Batteries
Equipment
Depreciation
Total Equipment Operations Expense
Vehicle Maintenance Expense
Parts
Direct Labor
Supervisory Labor
Total Equipment Maintenance Expense
Other Equipment Expense
Equipment - Rental/Depreciation
Containers - Rental/Depreciation
Garage
Insurance
Other
Total Commercial Service Exp,-Other
Municipal and Public Service Expense
Wages and Salary Expense
Supervisors
Drivers
Helpers
Total Wages and Salary Expense
Vehicle Operations Expense
Gas and Oil
Tires and Batteries
Equipment
Depreciation
Total Equipment Operations Expense
Current
Year
Previous
Year
Increase or (Decrease)
Dollars Percent
$.
$.
$.
$.
$.
$.
$.
$.
-------
FIGURE 5 (Continued)
Current Previous Increase or (Decrease)
Year Year Dollars Percent
Vehicle Maintenance Expense
Parts $ $.
Direct Labor
Supervisory Labor
Total Equipment Maintenance Expense $ ~~. Iff!
Other Equipment Expense
Equipment - Rental/Depreciation $ $.
Containers - Rental/Depreciation
Garage
Insurance
Other __.
Total Other Equipment Expense $ _$_,
Total Municipal & Public Service Expense $ $.
"Services with Special Rates" Expense
Wage and Salary Expense
Supervisors $ ...... $.
Drivers ......
Helpers ......
"
Total Wage and Salary Expense $
Vehicle Operations Expense
Gas and Oil $ $.
Tires and Batteries
Equipment
Depreciation
Total Equipment Operations Expense $ $.
Vehicle Maintenance Expense
Parts $ ...... $.
Direct Labor ......
Supervisory Labor ......
Total Equipment Maintenance Expense $.
-------
FIGURE 5 (Continued)
Current Previous Increase or (Decrease)
Year Year Dollars P ercent
Other Equipment Expense
Equipment - Rental/Depreciation $ $.
Containers - Rental/Depreciation
Garage
Insurance
Other _^U_I_UL
Total Other Equipment Expense $ JT
"Total Service with Special Rate" Exp. $ IT
Total Collection Expenses $. . . . . . ]T
REFUSE DISPOSAL EXPENSE
Landfill
Wage and Salary Expense
Supervisors $ $.
Drivers
Helpers _JHJLU^. :
Total Wage and Salary Expense $. . . . . . _$_.
Vehicle Operations
Gas and Oil $ $.
Tires and Batteries
Depreciation or Rental
Insurance '
Total Equipment Operations Expense $ JT
Vehicle Maintenance Expense $ $.
Parts
Direct Labor
Supervisory Labor
Garage ......
Total Equipment Maintenance Expense $'. ..... Iff.
Disposal Cover and Fill Material $ $.
Licenses, Fees, and Taxes
Rent
Total Landfill Expense $ jjj_.
Dumping Fees Received $....A. $.
Net Total Landfill Expense
-------
FIGURE 5 (Continued)
Current Previous Increase or (Decrease)
Year Year Dollars Percent
Incinerator
Operating Expense
Wage and Salary Exp.
Supervisors $ $.
Skilled Workers
Other Salary and Wages .
Total Wage and
Salary Expense $ $.
Fuel $ $.
Depreciation or Rental/Fee
Equipment Maintenance Exp.
Parts
Direct Labor
Supervisory Labor .
Total Equipment
Maintenance Expense
Insurance $ $.
Licenses, Fees, Taxes
Other Incinerator Expense
Total Incinerator Exp. $ $
Incinerator Fees Received - $ $.
Net Total Incinerator
Expense
Net Total Disposal
Expense
All. to Res. Serv. $ $
All. to Comm.
' Ser. -Containers
AIL to Comm.
Ser. - Other
All. to Mun. &
Public Service
All. to Ser. with
Special Rate
Net Total Disposal
Expense
73
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FIGURE 5 (Continued)
Current Previous Increase or (Decrease)
Year Year Dollars Percent
GENERAL OFFICE EXPENSE
Supervisor's Salary $ $.
Other Salary and Wages
Vehicle Expense
Injuries and Damages
Industrial Insurance
Health and Welfare
Retirement Contributions
F.I.C.A. Costs
Employees Liability and
Surety Bonds
Equipment Insurance
Insurance - General Liability
Legal Fees
Accounting Fees .,.,.. ,
Depreciation of Office Equip
Miscellaneous General Exp. ____
Total General Office Ex. JT,
Total Operating Exp. $ $.
NOTE: Only those expenses which cannot be allocated between collection
and disposal should appear under General Office Expense.
74
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FIGURE 5 (Continued)
COMPARATIVE BALANCE SHEET
As At
Current Previous Increase or (Decrease)
Year Year Dollars Percent
ASSETS
FIXED ASSETS
Organisation $...'... $
Land
Buildings, Fixtures, Grounds
Equipment
Less Accumulated Depreciation
and Amortization _u_i-U_i.
Total Fixed Assets $ $
CURRENT ASSETS
Material and Supplies $ $......
Operating Fund Cash
Special Deposits Cash
Special Deposits Investments
Cash-On-Hand
Other Current Assets , . .
Notes Receivable .......
Accounts Receivable - Customers
1-30 Days
31-60 Days
61-90 Days
90 Days and Over
Accounts Receivable - Other
Prepayments
Less Provision for Bad Debts __._._._LJL_^
Total Current Assets
OTHER ASSETS
Lease-hold Improvements $ $
Total Unadjusted Debits $. . . . .T $ ._
TOTAL ASSETS $ $
75
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FIGURE 5 (Continued)
COMPARATIVE BALANCE SHEET
As at
LIABILITIES AND OTHER CREDITS
Current Previous Increase or (Decrease)
Year Year Dollars Percent
OWNER'S CAPITAL
Initial Investment $...... $......
Unappropriated Retained Earnings . . .
CURRENT AND ACCRUED LIABILITIES
Salaries and Wa.ges
Loans Payable
Customer Deposits
Data Processing Charges
Federal Taxes Payable
State Taxes Payable
Local Taxes Payable
Accounts Payable
1-30 Days
31-60 Days
61-90 Days
90 Days and Over
Notes Payable
Total Current and
Accrued Liabilities
OTHER LIABILITIES
Donations $ $.
Grants .
Total Other Liabilities $
TOTAL LIABILITIES $ $.
76
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somewhat isolated to other commercial. In cities where large numbers of
commercial customers are picked up on residential routes, then a classi-
fication such as "all containerized" and "all non-containerized" would be
appropriate.
Further breakdown of the expense accounts appears in the
third table, "DISTRIBUTION OF OPERATING EXPENSES." This will
permit a detailed isolation of labor, equipment, operating, and maintenance
expenses, and will be useful in the justification of rate increases should
some form of regulation occur. The fourth table, "COMPARATIVE
BALANCE SHEET, " permits an assessment of the company's liquidity and
geheral solvency.
b. Issues Involved in the Determination of the Rate of Return
In any regulated industry, it is difficult to determine what
constitutes a fair rate of return because of the many variables involved and
the variety of viewpoints regarding fairness. A long list of legislative
precedents define Supreme Court interpretations of what constitutes a fair
rate of return. One particularly complete description was stated in the
decision in the Consolidated Gas case of 1909, which is:
There is no particular rate of compensation which must
in all cases and in all parts of the country be regarded as
sufficient for capital invested in business enterprise. Such
compensation must depend greatly upon circumstances and
locality; among other things, the amount of risk in the
business is a most important factor, as well as the locality
where the business is conducted and the rate expected and
usually realized there upon investments of a somewhat
similar nature with regard to the risk attending them.
There may be other matters which in some cases might
also be properly taken into account in determining the rate
which an investor might properly expect or hope to receive
and which he would be entitled to without legislative inter-
ference. The less risk, the less right to any unusual
returns upon the investments. One who invests his money
in a business of a somewhat hazardous character is very
properly held to have the right to a larger return without
legislative interference, than can be obtained from an in-
vestment in Government bonds or other perfectly safe
security. . . ._'
- Willcox v. Consolidated Gas Co., 212 U.S. 19, 48-49 (1909).
77
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Two factors are highlighted in this decision: Return on invested capital
and return on risk. In industries which have had a long history of com-
mission regulation, operating data exist to permit statistical determina-
tion of rates of return, and these are used in adjusting for "fairness" from
time to time.
Another consideration in determining rate of return is
efficiency, i. e. , more efficient utilities should be offered a reward for
efficiency in terms of a higher rate of return. In a Supreme Court case,
Justice Brandeis argued as follows:
Inefficient operations sometimes penalize the guilty
utility and this matter of efficiency compared with in-
efficiency in the operations of a public utility has given
rise to considerable controversy in regulatory circles as
to the impact efficiency, or the lack of it, should have
in fixing the allowable return. It does not appear to be
reasonable to penalize a public utility's customers or
subscribers for the inefficiencies of the utility. It would
seem to be more reasonable that a utility should be
allowed something more in the rate of return if it has
demonstrated its ability to operate efficiently. While it
is difficult to accurately evaluate this factor because of
its imponderable nature, it would appear reasonable to
conclude that a public utility is operating efficiently if
it has a minimum of service complaints, is constantly
improving its service, but is still able to produce higher
earnings on lower rates than comparable or similar
utilities in the same general area.JL'
. Competition is supposed to compel management efficiency
as firms seek ways of reducing costs in order to maximize profits and in-
crease sales. Under regulation, however, if rates are fixed so as to
enable all companies--those well managed and those that are not--to cover
their costs plus receive a fair rate of return, there may be no stimulus
for efficiency. Therefore, in determining a fair rate of return in an industry
newly being considered for regulation, some incentive for efficiency must be
included in rate regulation procedure.
-'General Telephone Co. of Florida, 44 PUR 3d 247,255 (Fla. 1962).
78
-------
Another consideration in determining a fair rate of return
is the "opportunity cost" of being in business. A solid waste firm's oppor-
tunity cost would be the revenues its owners could obtain by investing their
capital elsewhere and working elsewhere. Although there are many advan-
tages of being self employed, unless solid waste firms earn an "acceptable"
rate of return they will, if economically rational, either leave the industry
or refuse to invest in new needed equipment. They will "eat up" their
fixed capital and then, if possible, leave the industry.
Interest rates are another consideration in judging a fair
rate of return. If interest rates arc lo\v and all firms are earning a low
profit rate, then the fair rate is low. The reverse is true when interest
rates are high and firms are earning a low profit margin. Regulated
industries, like unregulated industries, compete for necessary funds in
the "money market. " Regulated industries must be competitive in their
earnings if they are to maintain their facilities and credit ratings. As
profit levels and the rate of interest have grown over the last decade, it
appears that the "fair rate of return" has increased. A fair rate of return
can only be defined in terms of relevant economic conditions in the area
under consideration. After defining the "fair rate of return, " regulatory
bodies will be faced with the problems of regulating the charges of each
company.
c. Operating Ratios
There are two basic methods of computing rate of return
for regulatory purposes: Rate of return on capital investment or "rate
base," and rate of return on operating expenses, or "operating ratio. "
The first of these is normally used in capital intensive industries, and
the latter in labor intensive industries. Examples of capital intensive
industries are shown in the table on the following page, with the labor
and capital expense shown as a percentage of total operating expenses.
79
-------
Industry
Hydroelectric Power
Steam Generation
Bell System Telephone
Industry Average
Labor Expense
as a % of Total
Operating Expense
12%i7
15^
12%^
Capital Expense
as a % of Total
Operating Expense
88%
85%
88%
In comparison, for the solid waste management industry collection, labor
ranges from 55 percent to 87 percent of total collection costs, which is
significantly higher than in hydroelectric power, steam generation, or
telephone service. The specific operating figures for solid waste are
shown in Table 6 later in this section.
For these reasons, the "rate base" concept used in gas
and electric utilities does not make sense for this industry. An alternative
method of rate determination is the "operating ratio" method. The opera-
ting ratio is defined below.
,~_ ,. ,. Operating Expenses
Operating Ratio = -~£ b f
c Operating Revenues
As can be seen from this ratio, it is the complement of gross operating
profit (e.g. , an operating ratio of 93% indicates a profit of 7%). The justi-
fication for the use of the operating ratio for this type of industry can best
be presented by the following quotation:
"The use of the operating ratio arises from the charac-
teristics of the motor carrier industry. The amount of
investment is relatively small in relation to total costs.
As explained by the commission:
Phillips, Charles F. , Jr., "The Economics of Regulation"; publisher,
Richard D. Irwin, Inc., 1969, p. 541
-/Ibid, p. 654.
80
-------
"In industries where the amount of investment is large
in relation to total costs, the rate of return on investment
generally has been accepted as appropriate for determin-
ing revenue needs. In such industries the risk is related
more to the amount of the investment and less to costs.
On the other hand, where the amount of the investment is
relatively small in relation to total costs, investment is
not the primary factor in determining revenue needs. . . .
The owners of motor carriers can hardly be expected to
look to the return on the amount of their investment as an
incentive where the principal risk is attached to the sub-
stantially greater amount of expense.
The essential point is that when investment is so small
in relation to total costs, "the margin of revenues over
expenses required to pay a normal rate of return on capital
invested would be so small that a slight miscalculation of
probable revenues or expenses could leave the carrier
with revenues insufficient to pay operating expenses.' _'
The uniform system of accounts, developed by Applied Management Sciences
in this study, permits the uniform calculation of the operating ratio, so
that a regulatory agency could analyze ratios prepared on a comparable
basis.
In order to obtain some insight into the operating ratios
of this industry, operating data on fifteen municipal and three private solid
waste operations were examined. Because of the lack of a uniform system
of accounts, the accounting data needed to be reorganized to provide com-
parability. Raw operating data are shown in Figure 6, while ratios
computed from these data are shown in Figure 7. Obviously, based
on these few operations, no attempt was made to achieve statistical sig-
nificance. Other ratios beside the operating ratio are useful as indicators
of efficiency, -which is discussed below. The geographical locations of the
municipal operations (not the private) are shown in Figure 8.
Six of the cities--Fort Worth, El Paso, Des Moines,
Tacoma, Anchorage, and Sarasota--have user charges. Two municipal
systems, Sarasota and Tacoma, service commercial as well as residential
Phillips, Charles F. , Jr., "The Economics of Regulation"; publisher,
Richard D. Irwin, Inc., 1969.
81
-------
FIGURE 6| COHP/WISOH Of OPCTATIHC COSTS AMONG CtTKS
COST AV5 FRFOfUUNCE
Total Operating Exp.
Kevtnje*
Collection Expense
Coll. Salary 4 Uige*
Collection t<\y. Exp.
::-.y ?cpul«lw-l97a
.-* ° *e3 ' Cn
~p of Corn. Units Svd.
f c( *«)td. Stop*
4 Of Cortn. Stops
I font Kes. collected
t Tom Coca, collect.
I of collection Enpl.
# Dtipoul Employees
0 of Tons Disposed
Crew Size-Collection
Monthly User Charges
8«?lc Res. Service
t -./*.. l«».)
C.v:cc/-a>.
r
1970
$7,301,443
55,653,937
54,9J7.3J3
$ 6Jl,)7i,
1,213,044
216. 2S3*
33,750*
708,750
382,4003
95,600
3
aontt
1970-71
$7,317,091
S3.430.300
«95,i»l
100,030-*
600,000
(02,299
335,519
3.3=
<-,
\969
$3,343,585
$2,1*2,739
51,697,750
448.1.92
145.348
U3.8-.8
195,051*
287
««,
1971
$2,278.093°
$1,619,435
51,347,736
$ 163,909
431.977
*6.000-»
46,000
47,772
102
3
no*.
1970-71
53,407,952
53,514,893
$3,209,537
5!,6:o,9:0
$ 583,627
3rt,1l»
104,743,
104,748
3,861
180,458*
306,801
3
$2.50
55.00
carry out
1970
$3,297,006
53,221,956
52,397,203
» 335,707
371, Ml
IJ1.904
131,904
140,379
200
150,000
4
«0«
1970-71
C! Poo
ST., 318, 113
$2,341,290
5!, 150. 456
51,708,000
$ t,!8,461
3I7,i(,2
75, IW
143,650*
341
169,000
$2.50/i«>.
twice vk.
1972
(Boig.t)
Oiytcn
53,122,720
52,360,320
51.996,240
$ 671 500
5 323.580
231,591
7o,«s;i
35,000
none
1971
51.725,402
51,973.088
51.312.713
S 774,701
$ 412 6S9
$ 176,116
S 238,373
101,904
w.coo
60.000
56.230*
71
17
193,000'
3
$1.00
1971-72
Grand Rapid
$609.034
$313. 984
$240.593
$270,070
$127,050
$ 99,217
195. -92
57.615E
19
. 12
none
1970
Tacoma
$1,472, 465°
S1.J31.M3'1
$1,252,0541
S 803,538
$ 220,411
$ 74,34$
$ 103,571
151, OH
47.150
10,120
47,150
10,120
12,782
12,503
80
7
195,450
3
$2.60
1971-72
$596,367
$506,367
$233,041
$ 90 COO
$ 36,000
$184,947
66, Ml
20, OC3*
5,000*
20,000*
5,000*
46,500
23,400
26
87,750-'
3
none
1971
$'.,032,403
$1,072,476
$ 959,175
5 527,136
S 41 334
46.137
1J.5/C-
$3.63
$5.40
1970
$751.503
$730. COO
$6*1.684
$3'!>,736
.U, 740
12,623
27,236
30.332
"
30
33,252
2
$2.93 +
sultsiiy
1971-72
$146,327
$122,327
$101,637«-
13,373
26,746
3
none
$ 8,750,000
$10,3^0.000
Company
$3,490.000
$4.300,000
$ 710,003
$1,450,000
Coi«7»nT
$7.700. COO 1
t 1, 280. 000
$4, 630,000
$1.290.000
A. Estimated
B. EstlmateO - BOX of all tonnage
C. 3 run 3 days/w'x. and 4 teen 3
D. Extrapolated - excludes K3.I
1. Converted fro-n population figures at 3.4 persons/residence
P. Converted from cul>le yds, .it 500 Ibs. per cubic vd.
C. Less Crusher Project Expense
H. Includes both cttirercial ond Industrial revenues
I. Excludes fringes (such as Insurance, PICA, Workman** Com?., «tc.)
but Includes Vacation, Sick. Leave, etc.
J. Exclude* 2 Codxlllas/1 nun each
K. Includes ttlnjj* benefit*
Reproduced from
best available copy.
-------
j, COKP/ttlSOS Of riSANCIAt. TUTIOS AMONG CITIES
1970 1970-71 1969 1971 1970-71 1970 1970-71 197Z 1971 1970 1971-72 1971 1970 1971-72
0?er»;inj Ratio (Total Exp-*- Total Revenue)
Collection Expense as T, of Total Expense
Ccllecticn l»bor as \ of Total Collection
ColUctloc Equipment «s I of Total Collection
Sposa
TT»; Cast ?«r Ton (Collection & Disposal)
Collection Cost/Ton
3i apes*. Ccst/Ton
^TLI! Cott/P*s!dcntl«l Stops
Annual Coi t /Residential Visit
S:t-pi/iirtct ".an/Week Residential
Tt'.al Stsps/TrutkA'tek Residential (Includes
Specials)
Rojte S'.cjs/TruckA'tek (Excludes Specials)
Tcr.j/ Tr-cV-A'etic (Total)
Total Collect. 3" Coits/Pcrson
Houston
Texan
.75
.87
.13
$18.70
$14.79
$ 3.91
JM.7J
$10.58
1,579
' 4,725
$ 4.G6
Stltl-ore
Varvl.-ni
' .74
.73
.17
$15.16
$11.76
$ 3.40
$36.59
$18.30
$ 6.07
Cinn.
Ohio
.64
.79
$17.16
$10.99
S 6.17
$23.26
$23.26
41,1
1,821
45.4
$ 4.38
H,l..«
.7;
.83
$38.78
$33.88
$ 4.90
$33.20
$35.20
460
1,333
1,438
27. Cc
(34 truck
$ 7.27
0,
Ft. Vortli Toledo 1 tl Paso
T««.i» | CMo Tex.s
1.03
. .81)
.82
.13
$18. 33
$16.73
$ 1.65
$34.40
$17.22
9S1
2,967"
2,9670
$ e.27
.97
.74
.18
.99
.93
.79
.21
$23.45 | $13.96
$22.95
f .50
$25.00
$25.00
131
J.368
54
$14.97
$ .99
$33.12
$16.56
»8»
2,413
47.6
$ 8.50 I $ 6.77
Dayton
onio
..7t
.84
.14
$33.67
$27.77
$ 7.90
$44.31
$44.31
$ 9.85
3c« Motncs
.87
.76
.59
.18
$24.74
$23.34
$ 1.40
$23. 1Z
$23.12
8J3
1,395
2,300
45. 1E
$ 6.62
Mpidl
Slch.
.56
.71
.24
1.73
Vr.sli.
.96
-M
.64
.08
$24.35
$23.72
$ 1.13
$31.22"
$31.22
743
I, £86
2,245
5C.2
$ s.:i
cott*
-------
Anchorage
oo
>' Tacoma J^'SST .
FIGURE 8: CITIES IN WHICH COST DATA WERE COLLECTED
-------
customers. Both have front-loaders which handle containerized refuse,
and these front-loaders were excluded from the analysis for comparability
with the other cities which handle only residential. "Light commercial,"
which includes waste stored in 20- to 30-gallon cans, is included for these
two cities. Private firms A and C serve both commercial and residential,
while firm B serves only commercial.
Two of these cities, Tacoma and Minneapolis, have pre-
dominantly alley pickups. These same two cities derive part of their
revenues from their disposal operations. One city, Fort Worth, has curb-
side plastic bag service. In addition, Minneapolis has a franchise arrange-
ment with a private corporation, MRI, which is an aggregation of 52 firms.
A complete description of MRI appears in a separate report. '
Figure 7, the ratio comparison, illustrates first that
cities with user charges have operating ratios _' from 87 percent to
110 percent, which indicates that a profit range from 13 percent to a loss
of 10 percent exists for this set of systems. Among the private firms,
operating ratios ranged from 82 percent to 93 percent, or profits of
18 percent to 7 percent on sales.
As previously mentioned, collection labor is a very
large percentage of total collection. It ranged from 55 percent in Anchorage
to 87 percent in Houston. The relative labor intensiveness is normally a
function of labor.rates and number of people used. Therefore, this can be
explained in some of the cities. For example, it is relatively low (56%)
in Scottsdale because of the two "Godzillas, " which reduce manpower and
increase productivity. It is relatively high (83%) in Minneapolis because
of the high labor rates in Minneapolis. Conversely, collection equipment
is relatively small as a percentage of total collection expenses ranging
from 8 percent in Tacoma to 24 percent in Grand Rapids. Again, some
Case Study Analysis of Solid Waste Manpower and Efficiencies, Applied
Management Sciences, Study in progress at this writing.
Complement of profits, e. g. , operating ratio = operating expenses
r operating revenues
85
-------
explanations exist for the relative capital intensity such as the age of the
fleet and, therefore, larger proportion of fully depreciated equipment
over ten years. In Scottsdale, it is high (21%) because of the high invest-
ment cost of the "Godzillas." Among the private firms, in one case, labor
was not able to be extracted; in another, it was 60 percent of total collection
costs; and in the third, it was 22 percent, primarily because they were
heavily in commercial business. In commercial business, the labor per-
centage is low because one-man-per-truck reduces the labor component,
and investment in containers increases the capital component.
In summary, for this study these ratios provide a range
of operating ratios which would serve as a guideline for beginning an analysis
of fair rate of return on revenues if solid waste management was organized
as a public utility. Clearly, a statistically valid sample should be drawn
for such purposes. This analysis did illustrate the labor intensiveness of
the industry which confirms the original assumption that rate regulation
would have to be based upon rate of return on revenue rather than on a rate
base of capital investment.
d. Rate Regulation
As a regulated public utility, solid waste firms will be
greatly affected by the rate structure chosen by the regulatory authority.
Bonbright, in his study on public utility rates, lists eight criteria of a
sound or desirable rate structure. They are as follows:
The related, "practical" attributes of simplicity,
understandability, public acceptability, and feasi-
bility of application.
Freedom from controversies as to proper interpre-
tation.
Effectiveness in yielding total revenue requirements
under the fair-return standard.
Revenue stability from year to year.
Stability of the rates themselves, with a minimum of
unexpected changes seriously adverse to existing
customers. (Compare "The best tax is an old tax.")
86
-------
Fairness of the specific rates in the apportionment of
total costs of service among the different consumers.
Avoidance of "undue discrimination" in rate relationship.
Efficiency of the rate classes and rate blocks in dis-
couraging wasteful use of service while promoting all
justified types and amounts of use:
. . in the control of the total amounts of service supplied
by the company;
. . in the control of the relative uses of alternative types
of service (on-peak versus off-peak electricity;
Pullman travel versus coach travel; single-party
telephone service versus service from a multi-party
line, etc. ). JL'
Admittedly, these criteria are broad and ambiguous
(what, for example, is "undue" discrimination?). They also overlap with-
out offering any rules of priority in case of conflicts. How is the "cost of
service" to be measured--marginal cost, average cost, or fully distributed
cost? Clearly, the measure largely depends on the purpose that a rate is
to fulfill. But the criteria are of value "in reminding the rate maker of con-
siderations that might otherwise escape his attention, and also useful in
suggesting one important reason why problems of practical rate design do
2/
not readily yield to "scientific" principles of optimum pricing."
Bonbright further suggests that the three primary criteria
are numbers 3, 6, and 8, namely,
...(a) the re venue-requirement or financial-need objective,
which takes the form of a fair-return standard -with respect
to private utility companies; (b) the fair-cost-apportion-
ment objective, which invokes the principle that the burden
of meeting total revenue requirements must be distributed
fairly among the beneficiari'es of the service; and (c) the
optimum-use or consumer-rationing objective, under
which the rates are designed to discourage the wasteful
Bonbright, James C. , Principles of Public Utility Rates (New York:
Columbia University Press, 1961), p. 291. Also see Russell E. Caywood,
"Electric Utility Rate Making Today," 81 Public Utilities Fortnightly 51,
53-54 (June 6, 1968).
-/Ibid, p. 291.
87
-------
use of public utility services while promoting all use
that is economically justified in view of the relation-
ships between costs incurred and benefits received.
The solid waste industry, if it is to be regulated as public
utility will face the problem of all regulated industries in determining a rate
structure. For the solid waste industry, numbers 3, 4, and 5 seem to be
appropriate to the primary objectives of the industry.
In ord.er to avoid the administrative and bureaucratic
delays which case-by-case rate tariffs would develop, the work of the
commission could be simplified by defining "classes " of service. Once
the tariff for a class of service was developed, any company providing
service would know what it could legally charge. Fortunately, the services
provided by the solid waste industry lend themselves to a logical classifi-
cation. A proposed classification might be as follows: (1) Residential;
(2) Light Commercial; (3) Heavy Commercial; (4) Industrial; and (5) Toxic
or Hazardous Wastes. Many cities and private contractors combine these
five into two, namely, residential and commercial, which covers all others.
The regulatory agency would define precisely the base level of service for
each class and the rates for each class. Sub-classes could then be defined
if necessary as described in the previous section.
Price inequity is partially unavoidable. The cost of
providing a particular service is difficult, if not impossible, to determine
accurately. Some variable costs, such as labor and fuel, are easily identi-
fied with a unit of output, such as tonnage or stops collected. Other costs,
however, such as overhead, are commonly or jointly incurred in rendering
different types of service. Rather than varying directly with output, they
decline in importance as output increases. These costs include interest,
depreciation, investment in plant and equipment, and administrative over-
head. When the same plant equipment, service, or overhead are used to
provide several types of service, there is no one correct way to allocate
88
-------
these costs among different units, of service. It will be up to the discretion
of the regulatory agency to judge the accuracy of the cost allocation used in
developing rates.
As a practical matter, the regulatory body should have the
accounting staff conduct an audit of the books of regulated companies so
that the accuracy of the information can be verified and the ground rules
used in allocating costs can be clearly understood. The existence of a
uniform system of accounts will be invaluable in comparing operating costs,
in particular, and in rate regulation, in general.
The methodology of rate regulation could proceed along several
paths. If done by a PUC, each "utility" could be required to file tariffs
indicating their rate schedules, and these tariffs would be reviewed by the
PUC. In the event of rate complaints by either the "utility" or a customer
concerning rate inequity, a rate hearing would be held including full finan-
cial disclosure and audit. The proposed new rates could then be compared
with rates for similar service within the industry, and operating ratios
compared with industry norms (which would have to be developed). The
commission would then pass judgment on the rates that could be charged--
either accept the proposed rate, modify the proposed rate, or reject the
proposed rate entirely and return to the previous rate.
Rate prescription by class of service is another methodological
approach to rate,regulation. In this case the PUC would prescribe a single
rate for each class of service which would be applicable to all firms pro-
viding that kind of service. Firms which believed the prescribed rate
provided too low a rate of return would have the right to appeal, and be
subjected to a full audit and cost analysis. If their case was true and other
firms showed similar cost experience, the PUC would be forced to recon-
sider the rates it prescribed.
Another approach which might be used by county or municipal
regulators might be to solicit bids for a series of exclusive, franchised
areas. As part of the bid, a complete specification of the service and .
complete financial disclosure would be required. A good model contract,
89
-------
a good uniform system of accounts, and audit authority would be a part of
this process. This would not t>e' regulation in the classical sense, but
rather would provide for periodic review of rates and quality of service
each time the franchise agreement expired.
3. Methods of Finance
Several different methods of finance are available to private
firms and quasi-public organizations: private debt and equity financing,
lease purchase, pay-as-you-go, revenue bonds. General obligation bonds
were not presented since they are limited to purely municipal operations,
and the solid waste component of these bonds may or may not be significant
and identifiable.
a. Private Debt and Equity Financing
This method is the most frequently used currently by
small private firms, large firms with franchises, and occasionally by
municipal government. Because of the nature of collection equipment,
which is trucks and containers, commercial loans for three to five years'
duration are common financial instruments. Often large firms with estab-
lished reputations in the banking community have a line-of-credit which
permits revolving loans up to a specified level.
Among private firms involved in franchises, another
element of collateral exists, namely the franchise and the guaranteed level
of income it provides. In one franchising example, Minneapolis, many
of the subcontractors to MRI found that this certain income level and
affiliation with a multi-million-dollar franchise provided them with the
borrowing power they needed. To date, only one of the 52 firms in MRI
has utilized the assignment of his contract as a financial mechanism,
although this is a common financing tool in other industries. This pro-
vides for payment from the contractor to the equipment supplier in the
event of default, but the liability of MRI is limited to the extent of monies
owed to the subcontractor, but not for the full price of the equipment.
This means that most of them have additional borrowing power which has
not been used to date.
90
-------
In another franchising situation, Oregon, the stability
provided by the franchise has also offered additional borrowing power.
Again, in only one case out o'f approximately fifty has the franchise been
assigned as collateral for an equipment loan, although the franchise
agreement specifically calls out this right as a provision of the franchise
agreement. The conclusion here is that the existence of a franchise
definitely provides additional borrowing power, and the longer the franchise
has been in existence with satisfactory performance, the sounder is this
collateral.
It should be noted that a disadvantage of private debt
financing is that, normally, higher interest rates are paid for this type of
financing than for revenue or general obligation bonds. This is true even
with the fluctuations in the money markets.
b. Lease-Purchase Agreements
This method of financing solid waste management
equipment is growing in popularity. It is attractive to the private operator
because with it he has less concern about financing and has a rapid write-
off of equipment since a lease is an expense item. It is attractive to equip-
ment manufacturers because it provides an additional selling point for them.
Many of the manufacturers are now offering this method of financing, and
at least one, Peabody-Galion, has set up a separate leasing company for
this purpose. Commercial leasing companies not in the solid waste field
are also beginning to get interested in this market. This method is not
limited to private contractors. Many cities, such as Des Moines, Iowa,
and Sarasota, Florida, are now using this mechanism. They have found
that this method is ideally suited for capital equipment like trucks which
can be written off in five years or less. Moreover, equipment costs can
then be treated as operating expenses, thereby eliminating severe cash
demands each time the fleet must be replaced.
c. Revenue Bonds
Municipal revenue bonds may be issued by a state,
territory, or possession or by any of their political subdivisions. For
example, municipalities, counties, and public agencies and instrumen-
talities such as commissions and authorities as well as private firrrji «an
91
-------
issue revenue bonds. The bonds are payable from revenues derived from
charges against the use of facilities owned by the issuer of the bonds. In
the past, revenue bonds have been issued to finance construction of canals,
turnpikes, water and wastewater treatment plants, and electric systems.
Today, revenue bonds are issued to finance such varied projects as
bridges, tunnels, turnpikes and expressways, airports, parking facilities,
rapid transit systems, dock and harbor facilities, arenas, auditoriums,
parks, hospitals, schools, dormitories, student union halls, and stadiums.
Two principal reasons for cities issuing revenue rather
than general obligation bonds have been that (1) revenue bonds are based
on the concept that only the users of the facilities financed by the sale of
the bonds pay for the facilities, and (2) revenue bonds arc not ordinarily
subject to statutory or constitutional debt limits.
When revenue bonds are issued, the issuers agree to
meet certain requirements. Rates must be maintained at a level sufficient
to meet operation and maintenance charges and annual debt service re-
quirements and also to provide certain reserves. Revenue bond issuers
are normally required to maintain an insurance level comparable with a
private enterprise providing the same function. In most cases, the issuer
agrees to maintain the properties in good repair and working order at all
times. Many issuers agree that no preferential treatment shall be accorded
any group or groups in the matter of payments of rates for services. The
practice of requiring the issuing agency to maintain a consulting engineer
of national reputation to provide a "watchdog" service over the operation of
the facility is becoming a common practice. Most issuing bodies agree
that they will keep proper books of records and accounts and that there
will be an audit at least annually of the properties by a certified public
accountant.
In a practical sense, revenue bonds cannot be used for
trucks since the life span of most bonds (ranging from 15 to 30 years) exceeds
the life span of the equipment by several times. Another practical con-
straint on the use of revenue bonds in this industry is the requirement for
a large enough issue to be attractive in the money market (e.g. , greater
than $1, 000, 000). Once trucks are excluded, many cities cannot put
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together a million-dollar capital requirement for solid waste. As mentioned
earlier, the City of DCS Moines is in the process of issuing a revenue bond for
$2, 000, 000 to purchase the land for, and construct two new land disposal
sites.
d. Pay-As-You-Go System
The opposite extreme of an all-bond policy for capital
improvements is the pay-as-you-go policymeeting the cost of current
improvements from current revenues. In the smaller cities, however, it
must usually be coupled with a plan of putting aside reserves for a specific
project or for general public improvements. With modified pay-as-you-go
systems, some predetermined portion of annual capital outlay is financed
by current revenues with the remainder coming from bonds.
Summary
In summary, solid waste management is a labor-intensive industry
as compared with the hydroelectric power, steam generation, and telephone
industries. This fact dictates the use of operating ratios as a basis for
rate regulation rather than the rate base commonly used in these other
capital-intensive industries.
In analyzing the operating costs of refuse collection and disposal
organizations, the first requirement is for a uniform system of accounts
for this industry, 'which was developed as a part of this study. The second
requirement is for revenue data which relates to the service performed.
This can be obtained if the system has either fixed charges or user charges
as defined in the preceding section. However, in systems which are
financed in whole or in part with tax levies, rate regulation would be mean-
ingless and impossible.
Based on a uniform system of accounts and revenue information,
operating ratios can be developed for this industry. The very small sample
of fifteen municipal operations and three private show a range of 87 percent
to 110 percent for municipal, and 83 percent to 88 percent for private. If
regulation is to be accomplished, a large statistical basis for operating
ratios should be developed.
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The point about operating ratios leads into the determination of fair
rate of return. While there are general historical guidelines concerning
fair rate of return which are tied to risk, the only practical way to address
this is to develop a statistical basis for the rate of return which is currently
being earned in the industry, and over time adjust for factors such as infla-
tion, changes in interest rates, changes in manpower availability, and
labor rates, etc.
Finally, capital financing for this industry is available from private
debt and equity sources. The existence of a franchise enhances borrowing
power in the private money market. In addition, revenue bonds can be
used for disposal site acquisition and development, but not for collection
equipment. Two basic requirements of revenue bonds are a large enough
offering to attract investors, and a maturity period which does not exceed
the life of the equipment. Using working capital to finance equipment is
not a good idea because it seriously affects cash flow.
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FINDINGS AND CONCLUSIONS
It is clear from the study that a wide spectrum of versions of the
utility concept are possible for solid waste management, and some are
already in existence. Therefore, the broad question of whether the
near-utility concept is feasible in solid waste management is a rhetorical
question -- the concept is feasible in many forms. The real question is
which form is most practical and most desirable from a variety of stand-
points. The findings and conclusions of this study are presented below in
summary form followed by answers to the questions posed in Chapter 2.
Finally, the rationale for these answers is presented.
The judgment of the study group, in terms of the optimal forms of
solid waste management organization and structure, constrained within the
framework of a public utility or near-public-utility concept, is as follows:
The solid waste collection function should be centralized at
a the level of the minor political jurisdiction -- city level
for city collection or county level for county collection.
The solid waste collection system should be administered
by the municipal government (or the county government
for collection outside the city).
The collection system should be owned and operated by
private industry under a franchise agreement. *
The disposal system may be owned and operated by either
city or county government, or private organizations --in
any case, subject to the continued surveillance of the public
health service and environmental agencies for environ-
mental quality.
*The Office of Solid Waste Management Programs does not endorse this
general recommendation since both public and private collections systems
can be equally efficient if managed properly. The decision to select a
public system, private system, or a combination thereof is dependent upon
local conditions.
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Both residential and .commercial accounts should be included
in franchised collection service, recognizing that differences
in equipment requirements may dictate different capabilities
to perform this service.
Regulation of the franchisee should be primarily by the local
jurisdictional (city or county) level of government.
Competition should be restricted to a limited number of companies
within a franchise area. However, there should be several franchises
awarded, which are renewed.by competition every three to
five yearia.
Eminent domain should reside at the level of government
which operates the landfill. Eminent domain is often
impractical because of the unwillingness of local officials
to invoke it.
Rate regulation should be a part of the franchising mechanism
and, therefore, be performed by the municipal government
level. Requirement for submittal of accounting data based
on a uniform system, and a full audit of these data, should
be a part of the franchising process.
Capital financing should be accomplished primarily by
private debt and equity sources.
The rate of return of the franchise holders should be deter-
mined based on operating revenues, and compared with
norms for the industry. *
The source of revenue should be from user charges accord-
ing to service rendered. Rate classes and rates should be
determined for commercial service based upon size of con-
tainer and frequency of pickup. For residential, it should
be based primarily on frequency and location (curb vs. back-
door) of pickup.
These are the findings of the study based upon examination of five
in-depth case studies of near-utility or franchising situations, a canvass
of 50 state laws, an analysis of financial data from 13 other cities, and a
review of classical utility precepts.
Many of the questions asked in Chapter 2 are covered in the afore-
mentioned conclusions, but it is useful to restate the questions in light
of what was learned in the study.
Is centralization of collection into one entity necessary or
desirable? The answer is "yes", primarily for reasons of
efficiency.
*For this industry the rate of return is not generally known. In the
future, however, this information may become available as more solid waste
management companies are publicly owned and publish their rate of return
for stockholders. Until such information is available (local) government
must set rates or fees based on their acceptance of the contractor's audit.
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Is regionalization a practical part of the solid waste utility
concept? If so for both collection and disposal? The
answer is "no" for collection, and "yes" for disposal.
Regional collection appears, at this time, to be politically
unacceptable. In addition, the region does not appear to
provide a strong enough administrative authority or relate
to individual users to the same degree as the more local
government organization. Distance is not as great a prob-
lem for disposal, however, and in light of the difficulty in
locating a site, locating a single or a small number of
regional sites for a large area has some merit.
Should residential and commercial collection be included
as part of the concept or only residential collection? Both
residential and cornmcrcial collection should be a part of
the concept for two reasons: First, in many cases, both
types of customers are interspersed geographically and
are a part of the route consolidation process; and second,
because the higher profitability of commercial service
tends to balance the lower profitability of the residential
service.
Should collection and disposal functions be combined or
separated in the utility form? They should be separated,
primarily because each represents an entirely different
set of problems which can be better handled separately.
In addition, maintenance of separate organizations inhibits
dependency on a single, consolidated unit.
Is limitation on competition desirable? The answer is
"yes"; limitation in the form of the issuance of a franchise
or franchises is desirable, primarily for reasons of efficiency.
Is eminent domain specifically for solid waste necessary
at the state level and as a vested power of the utility?
Eminent domain is most effectively vested at the level per-
forming disposal, but as a practical matter is not often
invoked.
What role should municipalities and counties play in the
management of solid wastes ? The most important recom-
mendation of this study concerns the role of the local
political jurisdiction -- the city and county. These units
should administer and regulate a franchised collection
system and participate in a regional or private disposal
system.
What is or should be the regulatory function of the public
utility commission or public service commission and other
state agencies such as the environmental agency? There
is no need for state PUC or PSC involvement assuming a
municipal-level franchising arrangement. The environ-
mental agency will continue to have a health and environ-
mental protection role.
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Should municipal revenues such as real estate tax levies
be used to cover operating costs in this industry? The
answer is "no", because there are other means available
which are compatible with franchising, and which are more
equitable to the consumer.
Should rates be, in fact, user charges which reflect specific
service rendered? If so, how should they reflect service
rendered? Rates should be user charges which are keyed
to frequency of pickup and container size for commercial
and primarily frequency and location of pickup for residential.
What types of depreciation periods are applicable to this
industry, and do most contracts or franchises cover ade-
quately this depreciation period? A three-to-five-year
depreciation period appears to be common for refuse
trucks. A wide variety of franchise periods exist from
one to ten years.
What are the requirements for a rate base and the rate of
return? Is this return on investment or return on sales?
The rate of return on sales is appropriate rather than rate
of return on investment because this is a labor-intensive
industry. The scope of rates of return varies from zero to
13 percent among municipal operations investigated, and
from 12 to 18 percent among private firms.
Are the population and/or other demographic characteristics
of the urban area serviced important?' With respect to the
scope of this study, these characteristics do not appear to
be important to the replication of a franchising system.
Are urban, rural characteristics important to replicability ?
Urban, rural characteristics would affect the level at which
franchising would be administered -- city if urban and county
if rural.
Does industrialization or the local labor market affect repli-
cability? Industrialization does not appear to affect the
replicability of franchising, but the labor market may affect
it if, as in Minneapolis, there is union resistance to franchising.
Are there special operational characteristics of the city, such
as alley pickups, which affect replicability? No, collection
systems obviously work under all conditions. There are, of
course, some cost effects.
Do political conditions exist, on a broad enough scale, to allow
replication of various utility concepts ? Political conditions do
exist to allow various utility concepts. It should be noted that
the political constraints are most important in the inhibition
of regionalization.
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The conclusions and findings and answers to questions were arrived
at through a deductive process which began with feasibility, then examined
practicality, then finally determined desirability. This process began by
eliminating the extremes. For example, the completely open-competition
situation, which now exists in many parts of the country, is one extreme
which was eliminated based upon the excessive competition problems to
which it often leads. At the other extreme is the monopoly situation which
exists in many cities in the form of municipal collection service. In these
instances, while route consoliation is present, there is no competitive
incentive for efficiency. For this reason, that extreme was also eliminated.
This left franchising, or oligopoly, as the remaining structure. This
judgment narrowed down the options since the conclusion that some form
of municipal franchising is best, eliminates many alternatives. Franchis-
ing implies exclusive coverage of an area of a city or county. It is com-
petitive in the sense that there are more than one franchisee in the total
metropolitan area, and that every three to five years the franchise is
opened up for competition.
Once the extremes were eliminated, a formidable task of reducing
the options remained. It was determined that this could be accomplished
best by arraying the issues and determining which were feasible, practical,
and desirable.
Management and Organization
Figure 9 on the following page illustrates the management and
organization issues and the study assessment of their feasibility, practi-
cability, and desirability. The question of no centralization at all implies
a completely free and open situation in which no single governmental or
quasi-governmental body coordinates the activities of solid waste collec-
tion and disposal. In the judgment of the study team, this is neither
practical nor desirable. The city level for centralization appears to be
the level closest to the actual operation of collection and the level at which
most people feel some influence in feeding back their desires or complaints.
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ISSUES FEASIBLE PRACTICABLE DESIRABLE
Centralization Level
None x
City xx x
County xxx
Region x
State x
Administrative Level
None
City xxx
County xxx
Region
State
Collection Ownership and Operation
Private xxx
City x x
County x x
Region x
State
Disposal Ownership and Operation
Private x x x
City x -x x
County xx x
Region x x
State
Residential/Commercial Coverage
Residential Only x x
Commercial Only x x
Residential and Commercial xxx
FIGURE 9: MANAGEMENT AND ORGANIZATION
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Moreover, it represents a level at which fees can be collected in a direct
and convenient manner. For these reasons, the study has indicated the
city (or minor political jurisdication) level as being feasible, practical, and
desirable as a centralization level. The county is used as a centralization
level in several parts of the country and, therefore, is feasible. In many
respects, it is also practical, especially in the case of disposal which in-
volves wastes which are collected in several adjacent governmental units
and deposited in a county land disposal site. For these reasons, the study
has indicated the county as being feasible, practical, and desirable for
collection outside the city. The regional level is something that is extremely
amorphous --it differs widely from among parts of the country. Often there
are councils of government that attempt to put together quasi-executive
agencies among adjacent counties and cities, and in some cases states.
But with a few exceptions, these agencies fail to have the power necessary
to accomplish a difficult operational task. For this reason, the study has
indicated the regional level as being feasible, but not practical or desirable.
Finally, the state is being used as a centralization level in several instances
in this field. However, it is so far removed from day-to-day operations
that it does not appear to be a viable mechanism for providing continuously
good service since the feedback from the people being serviced is a
cumbersome procedure if they would have to go back to the state govern-
ment. This single factor of remoteness from the day-to-day operations
appears significa-ntly strong for the study to conclude that, while the
state is a feasible level of centralization, it is neither practical nor
desirable.
The administrative level differs from the centralization level in that
it is more concerned with providing the feedback from the citizens being
served to the agency or company providing the service. It also deals
with a more specific set of responsibilities, such as the feedback of
opinion of the service and responsibility for the collection of monies and
the payment of these monies to the agency or company providing the
service. For this reason, the study has indicated the option of none is
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neither feasible, practicable, nor desirable. The city level, on the other
hand, appears to be a natural level -- one which has accepted its responsi-
bility to citizens in the past and has natural organizational mechanisms for
dealing.with it. Therefore, the study has indicated the city level is feasible,
practical, and desirable. Similarly, the county level has some mechanism
for dealing administratively with this problem. It is the judgment of this
study that the county level is feasible, practicable, and desirable to
administer collection outside the city. Both the regional and state levels
appear to be neither feasible, practical, nor desirable because of their
removal from the day-to-day operations. In order to properly administer
solid waste management services, an agency of government or organization
outside of government would have to be available to the citizens and have
an organizational structure which lent itself to efficient administration of
this service.
Among the options for ownership of the collection function, private
contractors have owned and operated collection functions for many years
across the country and, therefore, this option is feasible. When they
perform the service under a franchised situation, they usually perform it
efficiently and effectively based on the systems examined in this study.
Therefore, the private sector under franchising is judged to be practical
and desirable. However, in recent years cities have experienced an
increasing difficulty in managing this function along with the other diverse
duties of city government. On analysis of municipal systems across the
country, the study has observed many instances of subsidization and less
than breakdown operations. One of the reasons for this goes beyond
simple management of the solid waste system, but rather into city govern-
ment policies regarding the hiring of people and the creation of city jobs.
Historically, this has been a convenient repository of people who might
not be absolutely needed to perform the function. For this reason, the
study has indicated the city government to be a feasible and practical
owner and operator of collection systems, but not a desirable one. The
same thing might be said for county government. It suffers from some of
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the same problems of the city, and, in addition, a history of little
involvement by this level of government in the collection function. For
this reason, the study has indicated the county level to be feasible and
practicable, but not desirable. The regional level is feasible in concept
but, in instances in which it has been tried, has not been successful.
This stems from two factors: one is that regional authority and agencies
do not always have the full support of the participants and, as conflicts
arise between the participants, the regional authority usually loses the
conflict. The second reason is that the region is removed from the day-
to-day problem. A small town which is a satellite to a larger city.
which is 30 or 40 miles removed from the city, feels uneasy about relying
for its collection service upon a regional refuse collection system based
in that city. It just is not that close to the people. This has been demon-
strated so far in the instance of Des Moines, Iowa, in which the regional
authority has obtained successful cooperation in disposal but not in
collection.
Disposal ownership and operation is being conducted and can be
conducted by four levels: private firms, city government, county govern-
ment, and regional authority. It is also in the development stage at the state
level in Maryland and New York, but at this writing no site has been put in
operation in either of these states. Private firms have a history of develop-
ing disposal sites around most cities in the country. Until four or five years
ago, one of the serious drawbacks of private sites was their unwillingness
or inability to run a sanitary landfill. As a result of the efforts of the
Environmental Protection Agency, and the private owners themselves, the
poorly run sites which would not improve have been closed down, and the
good sites have been upgraded. Consequently, we are reaching a point
where privately owned and operated land disposal sites heed the environ-
mental and health standards set by the EPA Public Health Service. This
appears to be the only possible obstacle to private ownership and operation
of landfill sites. Assuming this obstacle is overcome, the study finds that
private ownership and operation is feasible, practicable, and desirable.
City ownership and operation of landfill sites also has a long history.
The problem that arises in the city operation is that most cities, especially _,
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those in the Eastern part of the country, are land poor and have just about
run out of land for disposal within their incorporated boundaries. For
this reason, they have to rely on counties or regional authorities or private
owners in some outlying areas. This problem is currently being faced in
a rather critical way by the cities of Washington, D. C. , and Philadelphia,
Pennsylvania, to name just two. For these reasons, the study indicates
that, while the city is a feasible and practicable owner, it is not a desirable
owner and operator of disposal sites in general.
The county appears to be the repository for most solid waste for a
metropolitan area and will be for some time. County-run sites usually
attempt to set their rates at a break-even or slightly profitable level, and
can compete in many respects with privately owned and operated sites.
For this reason, the study has found the county-run sites to be feasible,
practical, and desirable. Regional sites have possibilities, as is being
demonstrated in the region surrounding Des Moines, Iowa. They do, in
fact, illustrate a mechanism for a single site serving multiple jurisdictional
areas. For this reason, regional sites have been identified by the study
as being feasible and practical. The study has stopped short of calling
them desirable until there is more evidence that situations such as the
Des Moines situation will work out. It is the judgment of the study that
the state level makes no sense for the ownership and operation of disposal
sites, even though state-level public health officials are involved in sur-
veillance of these sites. This will be discussed in more depth later in
this chapter.
The residential and commercial coverage by the collector or collectors
who serve an area is a very important issue. . Residential collection is
defined in the study as single-family units and two-to-four family units,
but not including five or more unit apartments. Currently, all sets of
possibilities exist with respect to collection of residential and commercial
waste. In some cities, private firms pick up both types. In other cities,
municipal government picks up both kinds. And in a still larger set of
cities, there is some mix with municipalities picking up the bulk of
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residential waste and private haulers picking up the bulk of the commercial
waste. There are two major issues which lead to the conclusion that a
hauler servicing an area ought to handle both commercial and residential
waste. The first of these is an economic point. Commercial collection
is, in general, more profitable because of the efficiencies that are possible
in containerized service. For this reason, many cities which have chosen
not to get involved in commercial collection have, inherently, a smaller
chance of breaking even because they have strictly residential accounts.
The second point is one of an agency or company's responsibilities for
serving the public, and this includes both profitable and unprofitable
accounts and easy-to-service as well as difficult-to-service accounts.
This responsibility, in conce'rt with the economic opportunity offered by
commercial service, leads to the conclusion that a balanced mix of
accounts offers the collector an opportunity to make a profit and also pro-
vides the mandatory service to the community that it needs. It is, there-
fore, the finding that combined residential and commercial collection is
the feasible, practical, and desirable approach to this issue.
Legislative and Legal Issues
Figure 10 shows the legislative issues matrix. Regulation is
currently performed in solid waste management at several levels through-
out the country. As mentioned in the body of the analysis, it is performed
at the city, county, regional, and state levels. Therefore, feasibility
definitely exists at these levels and, in addition, practical regulation
occurs at the city, county, and state level. It is not clear whether practical
regulation can be conducted at the regional level although, for the disposal
function, it is beginning to be demonstrated in the Des Moines, Iowa,
situation. Also, most cities have a history of providing regulations of
solid waste collection and disposal through either franchise agreements
that are renewed periodically or rate regulations for specific types of
service. Similarly, county-level franchising has been in operation in at
least one state, Oregon, and to date appears to be working successfully.
The possible exception is that franchises are extremely long and no audit
requirement exists. Several other states are in the process of setting up
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ISSUES
Regulatory Level
None
City
County
Region
State
Competition
Free and Open
Franchise (Oligopoly)
Monopoly
Eminent Domain
None
Public Utility
City
County
Region
State
FEASIBLE
PRACTICABLE DESIRABLE
x
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
FIGURE 10: LEGISLATIVE AND LEGAL
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county-level regulatory boards for this industry. At the state level,
State Public Utility Commissions or Public Service Commissions now have
the legislative authority to regulate this industry in several states. How-
ever, in no instance to date has this regulation been implemented fully
such that desirability can be fully tested, although one would have to con-
clude that state-level regulation is feasible and practicable. It is the
conclusion of this study, in light of the franchising requirement, that the
most desirable regulatory Icvula would be the ciiy or county level and,
in time, possibly the state level could also prove to be desirable.
Competition is perhaps one of the cornerstone issues of the entire
stxidy since the degree to which competition is permitted or not permitted
has vast implications on the way in which this service is conducted. At
one extreme, free and open competition, which now exists in many cities,
is allowed to prevail and in many of those instances does not operate
efficiently and not in the best interest of the citizens being served or of the
contractors providing the service. As previously mentioned, at the
extreme this represents excessive competition which has historically
been guarded against by regulatory bodies. At the other extreme is the
monopoly situation in which a single agency or company has complete
responsibility for all types of collection, and in some cases both. In
these cases, and they are represented in many municipalities throughout
the country, efficiency ceases to be an important criterion of performance.
The Jack of competition or any regulatory control over quality of service
rendered, as well as budgetary considerations, results in no emphasis on
cost-cutting.
Primarily for these reasons and reasons of efficiency, which are
significant and are realized from route consolidation, it is the judgment
of this study that franchising or some form of oligopoly is the best and
most desirable way to conduct the collection function. This implies a
partitioning of the city and/or county into exclusive franchise areas which
would be served by a single company. In order to avoid the pitfalls of
the monopolistic situation, these franchises should have a duration only
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long enough to permit depreciation of capital equipment, which would
mean between three and five years in length, certainly no more than five.
The number of such franchises would depend upon the size of the city,
and should be left up to the discretion of the city officials who would per-
form the administrative function. Probably not less than two franchises
should be issued for any city, and the upper limit should be some workable
number.
The question of eminent domain is one which has received a. .high
level of attention prior to this study, but in the judgment of this study is
less important than many other issues. In law, it is commonly under-
stood that the state has the right of eminent domain and may delegate
this right to lower levels of government and, therefore, by implication,
the county and city have this authority. Regional agencies, when they
are formed, may or may not be given this authority, depending on the
laws under which they are formed. In the case of Des Moines, Iowa,
the regional agency does have this authority. It is almost common
practice in a utility situation to grant the utility this authority. Historically,
this has been required for the laying of railroad tracks, new roads, and
the location of power lines and sewer pipes. It is, therefore, both feasible
and practicable for all of these organizations to have this authority, with
the possible exception of the regional authority for which it may not be
practicable. However, political constraints usually dictate a very limited
use of this power; For a controversial subject, like the location of the
landfill, all levels of government are extremely reluctant to use this
authority, even though they have it. In the course of this study, the
question has been asked in many states, counties, and cities "why did you
not locate a landfill by condemning property". The answer has been, "the
political furor caused by such action would have been "horrendous."
Therefore, it appears that for some time to come the utilization of private
mechanisms for purchasing land and the normal processes of rezoning
such land will be heavily relied upon. It is the judgment of this study that
the right of eminent domain for purposes of land disposal sites is more
desirable to reside in the county, because this is normally the location of
the landfill site.
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Finance
Figure 11 shows the finance matrix. Rate regulation is currently
conducted in a variety of ways throughout the country. In some areas,
there is no rate regulation. In others, there is regulation by city, county,
regional, and state level of government. It appears that "no regulation"
is not a practical approach to developing an efficient system that provides
quality service at the lowest rates. City-level regulation normally takes
the form of city administrative officials contracting for services and con-
ducting these through either negotiated contracts or open-bid situations.
The city rarely assumes a regulatory role in competitive situations, but
only in situations involving the award of a franchise or a contract for a
specific area within the city. County-level regulation has taken the form
of county solid waste boards reviewing the rates of contractors and issuing
franchises in some cases for solid waste collection. At the state level,
the legal mechanism exists for public utility commission regulation of
rates. This is true in New Jersey and in several other states in a much
less well-defined way.
The actual mechanism of rate regulation is one which involves the
submission of accounting data based upon some uniform system of
accounting, the filing of tariffs for specific rates, the review of both the
accounting data and the tariff by the public utility commission staff, and
a rate hearing permitting the contractor to make his case. Finally, the
commission would pass judgment on the private contractor's rate applica-
tion. This is a process which is conducted in other industries as part
of the regulatory system. However, because of the large number of
private contractors which exist in most states, it is a cumbersome process
and one in which the public utility commission could get bogged down. In
addition, local differences in cost, labor markets, prices of equipment, etc. ,
are such that it would need to be conversant in all of these factors to pass
an enlightened judgment on rate applications. Once again, the fact that
the state-level government is removed from the day-to-day operations
would prove to be a handicap. It is, therefore, the judgment of the study
that city-level rate regulation would be in the best interest of the citizens
receiving the service and the contractors providing the service.
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ISSUES
FEASIBLE
PRACTICABLE DESIRABLE
Rate Regulation
Non e
City
County
Region
State
Capital Financing
Private Debt
Private Equity
General Fund
Operating Revenues
Revenue Bonds
Rate of Return
Open Market Determined
Regulated Based on Capital
Investment
Regulated Based on Revenues
Source of Revenue
General Fund
User Charges by Class Only
Commercial /Residential
User Charges by Service
Rendered Within Class
Fixed Charges
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
X
X
* Disposal Only
FIGURE 11: FINANCE
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Private debt, private equity, and operating revenues are the most
practical alternatives of capital financing. Utilizing monies in the general
fund in the municipal operation is one procedure which leads to lack of
visibility of true operating costs. An even more compelling reason for
not using the general fund for capital financing is that most city general
funds simply cannot withstand this surge in expenditures every four or
five years that is required to replace fleets of refuse collection equipment.
Operating revenues, while a feasible source of capital financing, are
usually not practicable because of the cash flow problem they cause. Most
cities do not generate enough operating revenue to replace their fleets
and still have a smooth cash flow, especially in light of what often turns
out to be slow collection of revenues.
Revenue bonds represent still another avenue for capital financing.
Such bonds make sense for the acquisition and development of disposal
sites but not for collection equipment. The reason is that the tenure of
a revenue bond normally may not exceed the life of the equipment which
it is being used to finance. Therefore, a fifteen-to-twenty-year revenue
bond could not be used to finance three-to-five-year life expectancy
equipment. For this reason, revenue bonds are not a desirable alternative
and only partially a practicable alternative. This leaves private debt
and private equity as the two most desirable forms of capital financing
for this industry.
The rate of return on operating revenues is currently determined
in most cases by the open market. Private contractors charge what the
market will bear in parts of the country which have no regulation. In
comparing the nature of this industry's financial structure with that of
other commonly regulated industries, it was found that this is an extremely
labor-intensive industry, unlike capital-intensive industries such as hydro-
electric power, steam generation, and telephone service. For this reason,
the conventional "rate base" which is used to determine rate of return on
invested capital does not make sense. Rather, "operating ratios" which
determine rate of return on revenues appear to be applicable. This leaves
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the two issues of open market and regulation based on revenues as the
only two practicable alternatives. Because of the possibility of either
excess rates being charged or the other extreme rates which are too
low being charged--it is the judgment of the study that some form of
rate regulation is necessary. Therefore, the conclusion of the study is
that regulation based on revenues makes sense for this industry. The
specific determination of what constitutes a fair rate of return is a very
complex issue, and one which has to be developed for each industry in
which regulation is imposed. There are general guidelines for determining
rate of return, most of which are tied to investor risk. However, the
only practical way to do this is to develop a statistical base of what opera-
ting ratios have been achieved and are being achieved among a very large
sample of the industry, and use this as a current guideline for establishing
an acceptable rate of return. In future years, then, as such factors as
inflation, the labor market, and interest rate change, the level of fair
rate of return can be adjusted.
The source of revenue issue deals with methods of generating day-to-
day operating revenues or working capital. Historically, this has been
accomplished in one of several ways: first, through tax levies, monies
were generated and deposited in the city's general fund. Then, based
upon the budget for the refuse collection service, monies were transferred
to the refuse collection operating budget. A second method is that of
assessing a user charge based upon the class of service. In solid waste
management, the two broad rate classes would be "residential" and
"commercial. " A third approach would be to assess a user charge based
upon service rendered. In this case, within the two broad classes of
service, sub-classes would be developed such as container size, frequency
of pickup, and number of containers. The fourth approach to generating
revenue would be assessing a fixed charge to all customers served.
All four of these are used throughout the United States and, therefore,
are feasible. However, only the two types of user charges appear to be
practicable. The reason for this is that for public services there is some
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rationale for charging citizens according to service rendered. In the case
of gas or electric, the technology permits careful metering of these
commodities and, therefore, the homeowner pays precisely for what he
has used. In the case of solid waste management, there are indicators or
parameters of usage; however, at this point in time, metering is not
possible. For this reason, the study is recommending as desirable, a
ft user charge system based upon service rendered within class. Further,
we suggest that frequency of pickup in the case of residential collection
^ is the most important single parameter, with number of containers being
somewhat less important. In the case of commercial service, size of
container and frequency of pickup are both equally important as two key
i parameters upon which rates should be based.
This completes an issue-by-issue discussion of the findings and
conclusions of the study. It would be naive to assume that a city could
i simply take the conclusions and overnight implement a brand new approach
to solid waste management. During the course of the study, Applied
Management Sciences has been very sensitive to the practical problems
j of transition when one system is phased out and a new one is phased in.
For example, an apparently smooth transition was accomplished in the
City of Minneapolis over a one-year period, in the formation of the holding
company, Minneapolis Refuse, Incorporated, from 52 smaller companies.
, In this instance, the smaller companies were giving up some autonomy
I
and independence, but were convinced that a unified corporate structure
would provide them the opportunity for more efficient operation and
better service to the community.
* :
Other problems in transition would be a city's reluctance to give
p up the Sanitation Department's collection function, even though the depart-
|
i ment may have been performing at low service levels, or inefficiently
I and at high cost. There is the institutional problem of ingrained depart-
ments not wanting to be reduced in size. Further, union or civil service
organizations might strongly resist the reduction in jobs resulting from
j a system change. However, this has been accomplished in the past through
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a phase-out period in which they allowed attrition to reduce the labor force
as the new organization or franchisee took over the service. There is also
an array of contracting problems which would have to be overcome in select-
ing franchisees, partitioning the city into franchised areas, and dealing equi
tably \vith each franchisee in terms of costs and his growth potential.
It is the opinion of Applied Management Sciences that a transition
period of at least one year, and possibly two, would be required to
accomplish all of these things which represent real, practical problems.
Depending upon the state of solid waste collection and disposal at the time
the transition was begun, they arc soluble in time. Should the Environ-
mental Protection Agency desire to pursue this concept, the next logical
step, a demonstration project, could be undertaken in which they would
underwrite the unusual expenses incurred during the transition period.
For example, there would be organizational, legal, and public relations
expenses in convincing both the community and existing private haulers
that a change was desirable and needed, etc. Such a transition would
require the highest caliber of technical assistance in the form of guiding
these activities over the one- or two-year period of transition. It is the
opinion of Applied Management Sciences that such a program would take
great strides toward establishing a model solid waste management institu-
tion in a single city in the country that could be cited as an example for
other cities to follow.
ya862
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BIBLIOGRAPHIC DATA
SHEET
1. Report No.
PB .225 332
I. Title and Subtitle
Public regulation concept in solid waste management
5. Report Date
1973
6.
. Author(s)
Applied Management Sciences
8. Performing Organization Rept.
No.
9. Performing Organization Name and Address
National Association of Regulatory Utility Commissioners
3372 ICC Bldq.
Washington, D.C. 20044
10. Project/Task/Work Unit No.
11. KXrXKiX-K'Grant No.
G06-EC-0038
12. Sponsoring Organization Name and Address
U.S. Environmental Protection Agency
Office of Solid Haste Management Programs
Washington, D.C. 20460
13. Type of Report & Period
Covered
Final report
14.
15. Supplementary Notes
16. Abstracts This report provides definition of what a public utility might be in solid
waste management, what forms it might take, and whether these new or unique forms
miaht provide more efficient and more economical service to the community than
existing systems. The study that Applied Management Sciences has conducted is called
a feasibility study, but it is really much more. It is an analysis of several
versions of near utilities now in existence in solid waste management and how these
verisons have deilt with real day-to-day problems in collecting and disposing of
solie waste. It has explored the finanical opportunities available to utility in
establishing the capital equipment and operating monies needed for operation. It
has examined the legislative framework which now exists at the state, county and
municipal levels in this field and the types of legislation needed to permit this
concept to work in the future. The study emphasis has been to extend beyond assessing
the theoretical conditions and application of feasibility to encompass the practical.
17. Key Words and Document Analysis. 17o. Descriptors
Public utility, sanitary landfill, disposal, legislation, municipal, regulation
17b. Identifiers /Open-Ended Terms
Centralization, solid waste management
17c. COSATI Field/Group
13B
18. Availability Statement
19. Security Class (This
Report)
UNCLASSIFIED
20. Security Class (This
Page
UNCLASSIFIED
21. No. of Pages
22. Price
FORM NTIS-35 (REV. 3-72)
USCOMM-DC M9S2-P72
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