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Friday, December 20, 2013

Rates Failing to Keep Pace


In the past few years, the industry has come to face a new challenging reality. Times are changing, and it’s time to get on board or be left behind. We have seen this through the industry-wide acceptance of new technology, increased recycling, and a completely different waste stream. In the old days, everything was thrown into one truck and dumped in the same hole for both residential and commercial customers. But that is no longer the case, and things have gotten a lot more complex. Now, not only are commercial clients recycling like their residential counterparts, they are also starting to compost. With all parties generating three different levels of waste, we can no longer sit back and send one truck to collect everything and deliver it to the landfill. Companies now send multiple trucks to the same location in order to collect, process and deal with this new challenge. And for the most part companies are on board, tackling these challenges head on, changing right along with the waste stream and making new programs successful. But one thing that hasn’t changed is how we establish the rates to cover the cost of doing so.

Current rate structures that are widely accepted by most jurisdictions tie all revenues for hauling trash, recycling and compost to the level of trash removal service only. In the mid 90s when AB 939 was first passed, this rate structure encouraged diversion because the more a person or business recycled, the more they could reduce their bill by reducing their level of trash service, in part helping sell the idea of recycling. At first, haulers were able to handle the gradual revenue losses due to migration, but over time the effects have gotten worse, especially as new programs, such as food composting, accelerated the migration. Another result of this recycling incentive is that the rate charged for servicing the smallest can is now artificially low because the relative cost of dumping a single small can is essentially identical to the cost of dumping single cans of larger sizes. Making matters more difficult for haulers is the fact that rates are typically determined just once in a rate year, so migration that occurs after rates are set causes unrecoverable losses during the year and higher rates in following years to close the revenue gap. Now with the introduction of commercial recycling and composting/organic services, this revenue loss or rate inefficiency has made its way into all aspects of a hauler’s revenue stream.

In the past, haulers believed that migration was a residential problem and that when commercial customers reduced service it was due mainly to economic factors (i.e. the recession). Almost no businesses used green waste cans and efforts to recycle focused mainly on cardboard collection, minimizing the impact other types of recycling had on trash collection. With the recent passage of AB 341 (more on this in a moment) and the expected introduction of a food-to-energy recycling program coming online soon, all this is about to change. Businesses in general will be stepping up their recycling efforts, and restaurants and supermarkets will be separating food waste from their trash. Commercial migration has begun to hit the industry harder and faster than the relatively gradual effects of residential migration. Compounding this problem is that commercial trash rates commonly help to keep residential trash rates down. Commercial recycling, therefore, threatens to have a huge impact on residential rates.

The problem isn’t with the industry changing, it is with how we account for it. Recycling was sold to the public in the mid 90s with the passage of AB 939 by promising that it was an inclusive service that will pay for itself. The rate a customer pays is for waste removal service and not for recycling. Recycling is free, and everything is included in one low price as the myth goes. Further compounding this misnomer, customers believed that when they recycled, haulers would be able to sell their goods and offset current rates. But we all know this is not always reality. Instead of reducing costs to a hauler, new programs have compounded company costs by introducing two additional routes per customer. This results in two additional trucks and labor to service the same location. Adding to this, we all know that the recycling market has been anything but stable, at times providing companies with some cost recuperation, but for the most part just helping reduce expenses. Now with the introduction of organics, haulers have come to adopt the removal of a third waste stream which is not a commodity and just adds more costs to a haulers bottom line.

With all these issues, one would think that rate structures would have been changing along with the industry. Instead rates are just falling to the wayside, having been established using the old model based on the myth of free recycling and organic service and at this point are nearly 20 years old. It has been nearly two decades since this model has been challenged. Politically, it is still taboo to bring up the reality that recycling and other waste reducing programs are not really free and suggest a fix to the rate structure. Bandages have been introduced into the failing rate system, balancing accounts, CPI or RRI increases, and arbitrary rates for commercial organics, are some of the ways jurisdictions and haulers have worked to fix the system. But bandages don’t work when the wound is a compound fracture where the bone has come through the skin.

As the California legislature has made recycling a law, a movement should be made to educate the public on the myth of free recycling. Once the public is aware of the reality, we can start to address the problem. Recycling is no longer a fragile idea that can fail. It has become an accepted component of “taking out the trash”. Most people are willing to help the environment, even if it means it costs more. Establishing base rate service costs, gallon to pound costing, cost per service line or my favorite, true cost modeling, would eliminate the rate structure problems that exist today. Rate modeling needs to come into the future. As soon as haulers feel comfortable with rates and know that they will always have enough to cover operations, new programs will be introduced that will bring us all closer to a truly zero waste economy.

Before adopting any of the aforementioned new “rate structures”, an analysis of your company’s cost structure should be performed and compared to budgetary needs. Failing to do so could adversely affect the financial stability in any given year causing large increases during the true-up cost analysis years, which are generally politically challenging. Ensuring your company has the ability to operate year-over-year and obtain the financial backing needed to operate is essential. 

Contact David Button, Solid Waste Business Development Specialist, at David.Button@Amllp.com or 415-568-3292 or Bill Brause, Solid Waste Audit Partner, at Bill.Brause@amllp.com or 925-790-2600 with questions or for more information. Armanino LLP Certified Public Accountants & Consultants is that largest CPA firm based in California with offices in San Ramon, San Jose, and San Francisco. Visit www.amllp.com

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