MEETING SUMMARY

RATE REVIEW COMMITTEE

Metro Regional Center – Room 370

March 29, 2006

Present:

Members  Metro  Guests

Michelle Poyourow  Councilor Rod Park, Chair  (none)

Matt Korot  Mike Hoglund, Director, Solid Waste & Recycling  

Ray Phelps  Doug Anderson, Solid Waste & Recycling  

Mike Leichner  Tom Chaimov, Solid Waste & Recycling  

 Sarah Moore, Intern, Office of COO  

 Gina Cubbon, Administrative Secretary, SW&R  

Members Absent:

Paul Matthews

Mike Miller

Councilor Park convened the meeting at 6:05; Doug Anderson explained that Paul Matthews and Mike Miller were unable to attend the meeting. The Councilor told the group that three Rate Review Committee (RRC) meetings are currently scheduled, but that he felt the charge may be completed in just two. The work done recently by the Rate Policy Sub-Committee should be a substantial help. All the RRC members were on that committee as well, with the exception of Mr. Matthews, who will meet with Tom Chaimov and Mr. Anderson soon to get all the background information.

Councilor Park asked Mike Hoglund about the current Disposal System Planning timeline. Mr. Hoglund replied that the Council may make a decision sometime in Summer 2006. “The decision will be [regarding] what’s Metro’s role in the [solid waste industry] but more importantly, what’s the number, location, and operational characteristics of the transfer facilities within the system.” Depending on the outcome, details will need to be worked out and there may need to be a transition period, he continued.

The Councilor gave the floor to Mr. Anderson to present a review of background materials. Mr. Anderson handed out discussion materials (attached). “What you’ll find as you look through here,” he said, “is the main lesson is that [SW&R’s] costs are up, but by a whole lot less than tonnage is up.” When costs rise less than tonnage, there is downward pressure on rates, Mr. Anderson explained.

There were questions about the representation of debt service. Mr. Anderson explained that the figure of $1,761,010 at the bottom of the “Debt Service” column [Table 1, column 6] represents 75 percent of next year’s scheduled debt service. This is the amount needed from rates. The handouts assumed that 25 percent of debt service will be paid from reserves, as is the case this year (and as recommended by the Rate Review Committee).

This $1,761,010, he said, breaks out as follows: $62,893 to the hazardous waste facilities (as they were partially bond-financed); $958,409 for the “stranded” portion that remains in the Regional System Fee; and $369,854—which represents half of the debt service allocated from the Regional System Fee to disposal charges at Metro transfer stations under the current rate structure. “The other half of the debt service that would be allocated under the full cost-of-service model but remains in the System Fee” shows in the ‘Unallocated Administration & Support’ block of Table 6. That $1.76 million, Mr. Anderson concluded, would be recovered from rates; the $587,003 at the bottom of the Revenue column would be drawn from Reserves. They add up to the full debt service. (The full debt service amount is shown in Table 2.)

Councilor Park recalled that the 50% split was to help pave a smooth path towards a cost-of-service model, and wondered aloud what the effect would be if the debt service was paid off sooner than 2009. In response to a specific question from Councilor Park, Mr. Anderson responded that SWR has the funds to pay off the remaining debt service at any time. However, “There’s always the opportunity cost of having money in the bank in case something comes along,” he cautioned. Mr. Hoglund added that the Metro Council has asked SW&R to explain the pros and cons of paying off the bonds now, but “it’s really not on the table for this activity” in the meantime.

The Councilor said it’s important to maintain a level of reserves for emergencies, such as problems at the Metro-owned St. Johns Landfill and adjoining Columbia Slough. Just last year, he said, Metro asked for financial help from the federal government for stream bank stabilization. “When I see we’re making requests of the federal government...,” Councilor Park began, and Mr. Hoglund filled in the blanks, that Metro requested over $500,000 from the government last year. A remedial investigation and risk assessment is taking place with the DEQ, he continued; CH2M Hill is serving as consultants. Over the next several years, there are a number of steps that will need to be taken to ensure the safe, permanent closure of that facility, Mr. Hoglund said in answer to a question from Michelle Poyourow. The Councilor said there is no need for Mr. Phelps or others to be concerned that Metro Council is going to use reserve funds on Parks or other non-solid waste projects.

“I’m trying to dry up the resources as quickly as I can,” laughed Mr. Phelps, before getting back on track to the discussion of background tables. He pointed to the fact that last year the rate didn’t go up in the same ratio as the Department’s budget. The budget grew by approximately 6%, Mr. Phelps pointed out, but the tonnage charge went up only a little over 2%. He said that shows him how much the rate is subsidized, and asked Mr. Anderson whether he was correct in that assumption.

Not entirely, Mr. Anderson explained. “The concept is pretty simple.” Year-to-year changes in the budget are largely driven by tonnage. If tonnage goes up, Metro has to budget more to pay the bills. The rate, which is a per-ton amount, might not have to change at all. The budget, he continued, shows “the actual dollars that we need to appropriate to spend.” Mr. Anderson posed a story problem: Imagine that one year, a certain amount of tonnage is expected, and that the next year, the tonnage doubled. “Our budget – in terms of the dollars we’d need to appropriate to pay the bills, is going to double [in that instance]. The underlying contract prices—the per-ton rate we pay—wouldn’t change much, so in this case our budget would double, but our rates wouldn’t change at all. Again, the reason you see big changes in the actual budget dollars is because we have more tons we have to pay to transfer, transport and dispose.” But if the per-ton rates don’t change much, Mr. Anderson continued, the tip fee doesn’t need to change much, either. Bottom line, it’s not about subsidy, it’s about tonnage, he concluded.

There was some clarifying discussion of associated issues, pointing to the fact that tonnage drives it all. “We’re running an efficient operation,” Councilor Park said. He and Mr. Phelps enjoyed some brief verbal sparring. “Absent any reallocation,” Ms. Poyourow asked Mr. Anderson, “is there not a possibility that the budget will rise due to costs rising in one particular area, and that is an area that goes into the System Fee?” Mr. Anderson responded if that particular area is a fixed cost such as the scalehouses, then the budget is driven entirely by factors other than tonnage—in this example, wages and fringe costs, most likely. But a rise in the scalehouse budget does not cause it to be reallocated to the System Fee, he said. In general, “if tonnage goes up by a faster percentage than our budget, then rates will decline because of fixed costs and the declining block rates in the operations and disposal contracts.”

Explanation of Table 2 continued with Mr. Anderson adding that tonnage projections were done last November, and are tracking within one-half a percent. Last year, projections were fairly accurate for Metro’s transfer stations, but off (low) for private facilities. This year’s projection is higher than last year’s for two basic reasons: growth, and a correction for our under-forecast of private facilities. Mike Leichner noted, however that “Historically, you guys have been almost on the button [with projections].”

Table 3 was described by Mr. Anderson next, and showed the current allocation model which uses reserves for a portion of the debt service amount to help smooth out the transition to a 2009 rate when there will be no debt service cost. The group had some historical questions about how bond covenants on coverage are handled in the budget and rate allocations, to which Mr. Anderson responded. According the Rate Covenant of the bonds, he said, the Department must set rates so that “net revenue” (current revenue less current expenses, as defined by the Bond Ordinance), is 110% of annual debt service. However, the Bond Ordinance excludes expenses on St. Johns [Landfill] from the net revenue calculation. So we collect a portion of St. Johns expenses from rates to meet the 110% coverage requirement, rather than building in an automatic mark-up.

“Does the Solid Waste Department normally sort of look forward, see tonnage going up, and use that possible revenue boost as an opportunity to expand or start new programs?” Ms. Poyourow asked. Mr. Hoglund said, “We do what we think we have to do to reach the [regional] recovery goal or to cover extra costs for operations. We actually kind of hold the line and shift [revenues] around to stop some programs and shift it over to start new programs,” he explained. For example, Metro’s revenue sharing with local governments has changed in recent years to allocate more on per-capita awards, and less for competitive grants, Councilor Park and Mr. Hoglund said.

Tonnage forecasts and the budget are calculated separately from one another, Mr. Anderson delved further. “The [tonnage] forecasts are kind of a technical exercise while [the Director and managers] work to develop the budget. We don’t look at the revenue opportunity or loss until the budget meets the tonnage forecast, and then we ask ourselves what’s reasonable and feasible.” There’s no law dictating that separation, he continued, but it’s been a “good business” practice at Metro for many years.

With a question from Mr. Leichner about the number of transactions shown in Table 3, conversation turned to commercial versus self-haul figures. An approximate total for self-haul can be found using a proxy of cash versus account customers, Mr. Anderson said, supplemented with some surveys. He hopes to get that information to the members at a future RRC meeting.

Mr. Anderson finished his background presentation. “The next steps are really two basic ones,” he said. “I’ve attached the Rate Policy Subcommittee Recommendations [to the agenda packet], and my understanding of what they would mean to the rate.” Mr. Phelps said that the tonnage and Regional System Fee shown in the materials are acceptable to him, and suggested moving on to the issue of transaction fee, “because I think that’s where we’re going to have to invest our time. I can’t fight math – it is what it is.” Mr. Anderson agreed that the first three recommendations from the Subcommittee were very straightforward, and the design of the transaction fee and self-haul would be the next step. With head-nods, the members agreed, and Mr. Anderson pointed out that in the evening’s analytical handouts he had not presumed to make the sustainability re-allocation from the tonnage charge to the Regional System Fee without the Committee’s recommendation. Everyone agreed to recommend that shift.

Proceedings proceeded to move to the issue of self-haul and the sub-issue of what constitutes true self-haul, as opposed to commercial customers who haul debris, roofing, et cetera, from homes and businesses they do work for, at the self-haul rate. A long and lively discussion ensued in which Mr. Anderson illustrated (literally, on the white board) some of the intricacies of the topic, such as that not all commercial customers use the automated system, and not all commercial customers have set up accounts with Metro, preferring to pay by credit card. This makes it difficult to track exactly who is, and isn’t one of the “third party” haulers, and encumbers designing a tiered transaction fee, the Committee gathered.

Mr. Leichner asked to also consider if the longer hours Metro stations have their scalehouses open compared to private facilities are cost-effective. “I’m fine with having [a tiered transaction fee such as –] if you run through the automated system, it costs you [for instance] four bucks. If you go through manually [scalehouse], whether you use a credit card or your account, it’s going to cost [for instance] nine dollars, because that’s the total cost built into that.” Councilor Park asked, however, “If someone comes in and uses their credit card, should we be charging a higher rate than you would for someone who wrote a check or paid cash?”

“[We might], if we could legally,” Mr. Anderson replied. “That solves that problem,” said Ms. Poyourow.

Turning to Mr. Korot, Mr. Leichner asked how local governments would be likely to react if a hauler presented their disposal fee and it showed they were paying a higher transaction fee per ton for using the scalehouses. “You might have one or two come in,” he said, “saying that that’s what Metro’s charging. But it’s because of their choice.” Mr. Korot agreed that it’s a matter of personal choice and he’d likely disallow it.

Upon request from the Committee about a plan for designing the transaction fees, Mr. Anderson drafted the following table on the white board (“impromptu,” he cautioned), which the Committee discussed from many angles:

TABLE 1. Scalehouse Operations, Billing Costs, etc. Attributed to Various Customer Classes

Mr. Leichner commented that self-haulers who come in to the station once or twice a year generate the a lot of costs. “He doesn’t know what costs he’s causing, so the operator has to watch out constantly,” he said. If the transaction fee more directly recovers that cost, customers who come in regularly as self-haul may find it cost prohibitive and move to the automated system. That’ll be part of the analysis.” Mr. Phelps maintained that in a true cost-of-service, Metro stations could stay open as long as they want.

From a rate design point of view, Mr. Anderson said, he’s not necessarily recommending having two customer classes on the scalehouse side – “cash” customers and Metro account customers as shown on the table on the white board. However, it’s often too hard a call to make efficiently at the point of sale. The table, he added, was intended to be analytic at this point: Account holders who use the scalehouse are potentially the highest-cost customers Metro has, and it is useful to know how much might be saved if those customers’ habits could be changed. It might be better to encourage more account customers to use the automated scales, he ventured. Councilor Park commented that the topic of who is not using the automated scales is something that should be looked at “as we continue to develop the models. The only question, I guess, based upon the policy choice that has been made, is how to drive more of those Metro accounts over to the automated scales.” Mr. Leichner said that to change customer behavior, “you’ll want to maybe artificially inflate that little number to give them reason to go over there [to automated scales].”

The group discussed this and intermittently revisited the topic of hours, as well. At length, Councilor Park said his gut feeling was that it’s unlikely hours would be cut. Cutting a full FTE, for instance, becomes very complicated because of coverage issues, overlap at peak hours, as well as figuring breaks, vacations, illness, etc. “It’s actually a rather complicated model,” Mr. Anderson said. Hours were cut about two years ago, with very little left to spare, Mr. Hoglund added.

On a shorter topic, the idea of charging higher rates for certain hours was dismissed as an administrative nightmare, costing more than the revenue generated.

Discussion wound around, with clarification of some members’ questions about what had been considered. Ms. Poyourow stated that once cost-of-service pricing is reached, “I wouldn’t be comfortable inflating the scalehouse [price] to move people [to the automated side].” Mr. Korot agreed, saying it would be inconsistent with the subcommittee recommendation.

“All I would like to achieve here,” Mr. Phelps stressed, “is to be sure the government’s not subsidizing – in any way, shape or form – this service that I could otherwise provide, theoretically, if all things were equal and the prices were the same. Whether [I] choose to do that is a different thing. But right now, you’re under-pricing a service I can’t deliver.”

In summation, Mr. Anderson said discussion this evening had accomplished agreement on customer classes. He would need to gather more information, however, in order to better identify cost centers and in order to begin debating how to allocate costs across customer classes. Issues to be discussed, he continued, include a minimum load charge, changing fees to help shift more customers to automated scales, and how much to charge for providers of clean-up & hauling services.

Councilor Park adjourned the meeting at 7:53 p.m.

Next meeting: Wednesday, April 12, 2005

6:00 p.m. Room 370A

gbc

Attachment

T:\Remfma\committees\Rate Review Committee\FY 06-07\Agendas & Minutes\RRC032906min.doc

Rate Review Committee

Background Information for FY 2006-07 Rate Discussions

Meeting 1

March 29, 2006

— Draft Preliminary Materials for Discussion Purposes Only —

Contents

Table 1. Derivation of Preliminary Revenue Requirements from Rates, FY 2006-07  2

Table 2. Comparison of FY 2006-07 Rate Requirements with FY 2005-06 Rate Model  3

Table 3. Preliminary Unit Costs and Tip Fee  4

Table 4. Recommendations of the Rate Policy Subcommittee/Implications for Rates  5

Table 1

Table 2

Table 3

Table 4

Recommendations of the Rate Policy Subcommittee

Implications for FY 2006-07 Rates

The Final Report and Recommendations of the Rate Policy Subcommittee of SWAC was accepted unanimously by the Solid Waste Advisory Committee (SWAC) on March 23, 2006; and presented to the Metro Council at their March 28 Work Session.

The following table summarizes the main recommendations, and describes their implications for FY 2006-07 rates.

The information in this table is intended to assist the Rate Review Committee in its design of next year’s rates.

T:\Remfma\committees\Rate Review Committee\FY 06-07\Attachments & Handouts\RRC032906 hnd.doc

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