MEETING SUMMARY
RATE REVIEW COMMITTEE
Metro Regional Center – Room 270
March 22, 2005
Present:
Members Metro Guests
Michelle Poyourow Councilor Rod Park, Chair Eric Merrill, Waste Connections
Matt Korot Mike Hoglund, Director, Solid Waste & Recycling Tom Koecher, Waste Mgmt
Ray Phelps Doug Anderson, Solid Waste & Recycling Dean Kampfer, Waste Mgmt
Mike Leichner Tom Chaimov, Solid Waste & Recycling
Paul Matthews Karen Feher, Finance & Admin. Services
Gina Cubbon, Administrative Secretary, SW&R
Members Absent:
Mike Miller
Chair Rod Park opened the meeting just after 6 pm. He and Doug Anderson explained the connection of rate-setting to the budget timeline. The budget will be sent to the Tax Supervising and Conservation Commission with rates adopted, Mr. Anderson noted. It’s an aggressive timeline, he continued, “...but it’s a good idea to have the rates firm when the budget goes in. But as a matter of law, we have to send the revenue requirements to the Tax Commission, but technically speaking, we don’t have to adopt the rates, so long as the rates do raise that revenue once they’re adopted.” Therefore, Metro’s budget could be released on April 7 (with the intent to pass a Resolution around May 5), but the budget could be sent without adopted rates, and when it comes back, rates could be adopted. “That buys us about another month to deliberate,” Mr. Anderson said. It will be up to the Council whether or not they will want to send the complete budget with rates or take that extra time.
Councilor Park responded that unless the Committee “gets really creative” about what they recommend, he hopes the rate will be ready to go with the budget. The current budget schedule includes meetings on March 29, April 5, and April 12. The Councilor asked if anyone had conflicts with those dates; Mr. Matthews said he will be unavailable on April 12; the remainder of those present indicated they’ll be able to attend all three meetings.
The Councilor briefly previewed the night’s agenda. At the last meeting, he recalled, the group had begun to look at the broader issues that affect the rates. “We know the economics of the different types of facilities, and depending on what their focus is, the rate structure has different impacts upon them.” Tonnage shifts have an increased sensitivity attached to them now, as well. “Is it good? Is it bad? Those are the kinds of things we want to get into a little more than we have in the past,” he said.
Mr. Anderson announced that he’d spoken to Council President David Bragdon, who gave him permission to release the summary budget numbers to the Committee ahead of the official April 7 release. He handed out a four-page packet of information to the attendees (see attached). Before going into detail, Mr. Anderson gave a quick overview of the presentation.
Page 1—FY 2004-05 Solid Waste Budget Summary and Rates, based on “Public Goods” allocation model. “To remind us all of where we were and where we’re going,” Mr. Anderson stated, this page is the current budget, which will be used for comparisons. This model, he reminded the group, allocates administrative costs, debt service, etc. to the Regional System Fee (RSF).
Page 2 – FY 2004-05 Solid Waste Budget Summary and Rates, based on RRC’s recommended “Cost-of-Service Allocation Model. This shows a scenario in which a cost-of-service model is fully-allocated and implemented.
Page 3 – FY 2004-05 Solid Waste Budget Summary and Rates, based on phasing 50% of the RRC’s recommended cost-of-service allocation model. The numbers here show “where we are,” Mr. Anderson explained – which is midway between the information on pages 1 and 2.
Page 4 – Economic Effect of Metro Rate Changes, FY 2003-04 to FY 2004-05, analysis of effect on selected ratepayers and facility costs, based on three allocation scenarios for FY 2004-05. “I decided to base the analyses [Councilor Park] asked for on the real numbers,” Mr. Anderson said. “We’ll see the effect these changes have on an average monthly collection cost for an average household, on facility economics for wet waste transport, and facility economics for dry waste recovery.”
Councilor Park asked if non-Metro facilities charge a transaction fee to self-haul customers. Waste Management and Pride Disposal / Recycling build the transaction fee into their rate; WRI calls it out separately. “So do you mimic the concept we have here?” he asked WRI’s Ray Phelps. Mr. Phelps replied yes. Mr. Anderson pointed out that “fixed or very sticky costs would be allocated to the transaction fee to cover just the cost of getting people in the door and moving them through. The disposal fee would cover the variable costs. It’s truly a tonnage-based relationship.”
During discussion of the “cost-of-service” model, Matt Korot asked a question about policy assumptions that seem to have been made to come to the numbers provided. Mr. Anderson asked Councilor Park “... if we could characterize the nature of the philosophical discussion we [last year’s RRC] had that led to these allocations and the choices made.” Councilor Park said he thought it was a good idea, noting that both Paul Matthews and the solid waste industry had some strong opinions at the time.
Dean Kampfer, a member of last year’s committee, said “I think we took a good, hard look at every line item and then tried to line it up with where that cost center best-fit, and tried to put a cost-of-service model together as to the rate.” General fund costs were aligned with programs to try and find a true cost-of-service, he said.
Mr. Korot said it seemed that at some point, “someone had to make an assumption that the model on which the original investment in the transfer stations was made was, maybe, no longer valid. That Metro, or however you want to define it, took a certain investment risk to build those facilities based on a certain flow. There’s been some amending of that, by Council directing waste elsewhere, and then here’s a decision again that those costs – that the original economic model was based on – no longer need to go there in their entirety. That seems significant, to me, to get to an allocation model.”
“We spent a lot of time on that very issue, “ Mr. Matthews assured Mr. Korot. “It’s substantially the debt service we’re talking about here,” he continued. The Committee broke that debt into two parts, he explained, and looked at Metro throughput versus total throughput, i.e., a utilization concept. If Metro had to handle all the region’s solid waste, he explained, its facilities do have the capacity. However, private facilities made that capacity, which had been built for the region, unnecessary. So the decision was made to pay part of the debt service region-wide, Mr. Matthews said, “...to not put that all on the back of Metro rate-payers, [but] spread that out as a regional cost.” The remainder, he explained, was put on the facilities where the rest of the customer base was going. “If you use one of these other guys’ facilities,” Mr. Matthews said the logic went, “they have capital costs they imbed in their costs, so it’s a fair allocation in that regard. If we had put all the debt service just on the Metro customers, it would have disadvantaged those customers, because they’d be paying debt service on things that were really built to provide service to the entire region.”
Mr. Anderson added some historical perspective, saying that at one time the rate model was very close to cost-of-service. During that time, the Solid Waste Advisory Committee (SWAC) was in discussions that ultimately led to the “quasi-privatized” system, in which licenses were granted for private facilities to handle wet waste. Council’s decision had to balance public policy questions with how to handle fixed costs that were being recovered solely through the transfer stations. At that time, it was @ 800,000 tons of throughput and fixed / contracts costs were considerably higher than present-day. In advance of the Code changes that allowed privatization, Mr. Anderson explained, there was an explicit change from the cost-of-service allocation model, to the “public goods” format. This model moved a lot of administrative and other fixed costs into the Regional System Fee, “..because that helped insulate the fiscal impact of granting wet waste to other facilities, from the good public policy.” Both are valid models, Mr. Anderson concluded; there can be good, rational debate about which suits the region better.
Mr. Matthews said that the current system is a hybrid of the two, referring to it as “Cost-of-service with some common sense.”
“As I understand it,” Councilor Park said, noting that he was not with Metro at the time, “...there was an agreement between the [solid waste] private industry and Metro to share those particular costs – debt service and so forth – as a price of entry into the market.” He asked if that was, indeed, the case.
Eric Merrill spoke up from the audience, “I may the only one who can speak to it; I was negotiating for Waste Management at the time. That’s not my understanding.” To his recollection, the Metro transfer stations were transfer stations of last resort, and so it was incumbent upon the region to support them.
Why did we move away from a model in which debt service was spread, to where 50 percent has been moved to the transfer stations? Councilor Park asked. Mr. Matthews said that last year’s RRC just wanted to take a fresh look at where costs should best be appropriated. A fair and equitable allocation was the goal. “I don’t think we made any explicit changes other than integrating stranded costs in there and coming up with a third fee.”
Ray Phelps, who was not a member last year but an active audience participant, said he agreed with Mr. Matthews. “I think it was one of those assessments that the rate review process was sort of a passive process. Here’s the number, here’s the tons, divide and go home. That had been going on for a couple of years, and the folks last year said no, we’d really like to look at this thing and decide how those costs really should appropriately be allocated.” He agreed, too, with Mr. Matthews’ recollection of the debt service. It had been distributed to two different cost tiers, and the two were joined preceding the current “public goods” model. “My recollection is that one of the reasons it was decided to fold [the two tiers] together was the fact that there was going to be wet waste going to the privately owned transfer stations.” He added, however, that there was no mention of a tonnage cap at that time. “So when debt service shifted back to Metro stations and the private operators got a limited amount of wet waste, all of a sudden that wasn’t the understanding that was struck up in the first place.” Mr. Phelps continued that this controversy lasted several years, and that prior to private companies taking waste, citizens who lived far from Metro’s two stations had to pay higher disposal rates. Private companies changed the scenario, and the rate model hasn’t caught up.
Mr. Anderson said that his memory of events was similar, that the issue of caps had “come in at the eleventh hour.” Councilor Park added that caps had been raised from 50,000 total to 65,000 wet plus unlimited dry waste tons a few years ago, and that’s where it remains currently.
Michelle Poyourow asked why half of the debt service was moved into the disposal charge; Mr. Anderson responded that the RRC had agreed to leave part as a regional fee because the transfer stations had been built to serve the entire region, but to have Metro customers pay the other portion to cover utilized capacity.
After further discussion, Councilor Park pointed out that when the private facilities first started taking waste, “...you came in as dry-only, so there’s been an evolution here that I want to keep out in front.”
Addressing the issue of Metro facilities as last-resort for the public’s good, Mr. Anderson said that costs of that are largely recovered in the transaction fee. “In the 1997-98 discussions that (the Councilor) Morrisette was involved in...Metro said they would hold the stations open for 14-16 hour, seven days a week operation; would take public customers, which all facilities are authorized to take, but not all want to for reasons of efficiency and traffic and so forth.” Mike Leichner disagreed, but Mr. Anderson said that they are all authorized. Mr. Phelps argued that they don’t take public customers because “we’d blow the cap. Don’t say we don’t do it because we don’t want to.” Councilor Park responded, “No, but you could.”
Continuing, Mr. Anderson said, “The Councilors were really struggling with the fact that we had the cost of two transfer stations, and – agree or disagree – in the mind of the Council, we did not have to grant wet waste handling at other facilities. A majority of the Council believed there were good public policy reasons to have smaller facilities scattered in the landscape. Tualatin’s rates [for example] went down immediately and directly as a result of WRI getting wet waste handling capabilities – a direct ratepayer benefit.” However, he noted that the fiscal impact upon Metro was of enormous concern to the Councilors (Mr. Anderson will present to the Committee white papers outlining the ensuing two-year discussion at a future date). Metro then made the move to change the modus operandi of the transfer stations “...from being open, public facilities to ones that would step back from a competitive role. We would, in return for that, be the disposal facilities of last resort in the sense we would make sure they’re always open, always up and running.” He explained that therefore, the Renewal & Replacement reserve, which is fully-funded and looked at every three years is one place Metro’s commitment “to keep the capital running, greased, and open” is in the budget. The long hours for convenience to the public are contained in the scalehouse costs.
“I will admit,” Mr. Anderson continued in his “institutional fossil” role, “...that policy has changed, eroded, and shifted over time,” including the caps that were instituted. “So while Eric [Merrill] correctly states the nature of the initial decision, it was also positioning the Council to be able to insulate the fiscal impact.”
The path back to the subject at hand (page two of the handouts) was found in due course, and the Committee resumed discussion of the math involved in the current rate and in the Regional System Fee. The “third fee” that the Committee recommended was not implemented explicitly, but was included in an adjustment to the RSF.
Moving on to the third page, Mr. Anderson explained that the figures therein summarize the current state of affairs (tip fee in terms of allocation). The two-year phase-in of the new model, he said, was to help avoid rate spikes that would have occurred otherwise.
Before moving on to the final page of the handout, Councilor Park said that he wanted to emphasize that as the tonnage moves from public to private, it affects the tip fee. Mr. Anderson then introduced the final page, “Economic Effect of Metro Rate Changes.”
“Councilor Park indicated in the last meeting,” Mr. Anderson said, “his interest in sharing this broad discussion of when we have discussions and make recommendations on allocation philosophies, he is also looking to this committee to examine and advise [the Council] on some of the broader system impacts when the rates are changed.” The table was to illustrate the effects that allocation changes of the nature previously discussed have on rates for curbside collection and on facility operations.
An underlying jump in all the rates shown was a hike in the Excise Tax; Councilor Park explained that $1.50 was added for Parks, $0.50 for the Oregon Convention Center, and an automatic CPI, plus a change in the method of calculation.
Mr. Anderson explained the figures on page 4. Ms. Poyourow asked why it appears the cost-of service model is more expensive for residents than the public goods model (referring to a seven-cent difference in the first line). “The basic reason,” Mr. Anderson responded, “...is that the cost-of-service model has the bottom line, the net effect, the arithmetic effect of moving costs from the [Regional] System Fee ‘bucket’ to the disposal charge.”
Mr. Matthews explained it differently: “The seven cents goes one of two places. It either goes to the private facilities or it goes to the residential and business customers of those private facilities, based on what the local regulators do.”
Councilor Park and Mr. Phelps began a discussion of whether private facilities tend to mirror Metro’s rate. Mr. Phelps said his facility does. “Trying to mirror Metro’s rate, we’re very sensitive to shifting from the disposal component to the Regional Systems Fee because our costs that Metro recovers through [the RSF], we have to get out of [the disposal charge].” Therefore, Ms. Poyourow surmised, the higher the disposal portion, the better for the private companies. The cost-of-service model benefits private facilities.
After further explanation of numbers by Mr. Anderson, there was discussion by facility operators Mr. Phelps and Mr. Kampfer about how their operations are affected. The City of Gresham’s Matt Korot then explained how the City handles rates. “The haulers can take material wherever they want. Waste Management’s [haulers] take theirs to their facility, Waste Connections takes theirs primarily to their [facility], the two family-owned haulers (Gresham Sanitary and Rockwood) do a split based on choice and calculation – much less hard consideration. When we do the rates, that’s where we do some adjustments,” he continued. “If it’s calculated that there’s some benefit inherent in taking waste to the Troutdale facility that Waste Management owns, versus [Metro] South or Central because of time savings, then we allow for the extra $3 on the tip fee. We’ve calculated that Waste Connections taking their material across the bridge to Vancouver and having a higher tip fee does not benefit our rate payers, so we don’t allow for that. We don’t direct the flow, but we factor the costs into our equation.”
Councilor Park noted that when private facilities were first allowed into the system, the theory was that it would be less expensive for ratepayers if haulers used facilities that were closer to them (less travel cost). However, if some facilities now charge more than Metro, it poses the question “Is it justified? I know [Mr. Kampfer] will say that it is justified,” the Councilor reflected, it goes back to the original assumption that private facilities would charge the same or less than Metro.
Mr. Anderson finished discussion of the economic effects of rate changes with an explanation of dry waste figures. Concluding, he said, “On a technical footnote, I want to make sure I put on a very public record here – because you know somebody is going to pick this up and say ‘Well, look at that dry waste recovery assumption: The margin’s bigger even than wet waste...’ So I want to go on record that you all know that, as [Mr. Phelps] said, that’s the money you have to do the work. And to get to 30% recovery out of dry waste, there’s a whole lot more cost on the private side... So even though there’s a $3-4 difference between the dry / waste margins, it’s because of the recovery assumption, when you’re reducing your costs of going to the landfill, but it takes a lot more work at the facility, so I would guess the actual private margin are considerably thinner on the dry side.”
As the group looked over all the numbers, Mr. Merrill noted a typographical error on page 4: There is a 25% price discount to 25% of customers (not 75% discount, as shown). Additionally, Mr. Merrill commented on the amount of subsidy paid to Metro in the different rate models on page 2. “Metro is loading up their direct costs by about 60%. Metro’s carrying an incredibly heavy management load, and if you use the cost-of-service model, Metro has a real opportunity” for Metro to streamline and lower their rates.
Mr. Anderson agreed that the figures shown would indicate an over 50% load, but said that “that’s actually an unfinished issue from last year. If you look at total disposal operations, it’s much less – more like $3 million out of the $26 mil – less than a 10% load.”
After some discussion about what is and isn’t fiscally constraining for Metro, Mr. Anderson wrapped up the meeting and said that for the next meeting, he’ll update the 4-page handout with the new budget numbers.
The meeting adjourned at 8:11 p.m.
Next meeting: Tuesday, March 29, 2005
6:00 p.m. Room 370A
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Attachment
T:\Remfma\committees\RRC\FY 05-06\RRC032205min.doc
