MEETING SUMMARY
RATE REVIEW COMMITTEE
Metro Regional Center – Room 270
March 15, 2005
Present:
Members Metro Guests
Michelle Poyourow Councilor Rod Park, Chair Easton Cross, BFI
Matt Korot Mike Hoglund, Director, Solid Waste & Recycling Dave White, ORRA
Ray Phelps Doug Anderson, Solid Waste & Recycling Dean Kampfer, Waste Mgmt
Mike Leichner Tom Chaimov, Solid Waste & Recycling Tom Koecher, Waste Mgmt
Paul Matthews Karen Feher, Finance & Admin. Services Eric Merrill, Waste Connections
Mike Miller Gina Cubbon, Administrative Secretary, SW&R
Members Absent:
-none-
Councilor Rod Park, Committee Chair, opened the meeting and welcomed everyone. He noted that “there’s an exception to every rule” and this committee’s exception is Paul Matthews, who was sought out for another term with the group although his term had expired. Councilor Park then asked if there were any changes or objections regarding the minutes of the last meeting; there were none and the minutes were approved as written.
Introducing the “Policy Background” agenda item, the Councilor explained that he had asked Doug Anderson to put together a history of the rates and how policy and industry changes have effected them over the years. “To set the stage of going into the future of rate review, Doug will have also some other information on how the numbers move around depending on some of the assumptions that you make,” the Councilor said.
Prior to making his presentation, Mr. Anderson asked if there were any questions regarding an agenda item that was not fully covered at the previous meeting, “How Metro Sets its Rates.” Handouts on the subject had been included in that meeting’s agenda packet. With no questions forthcoming, Mr. Anderson handed out copies of “Timeline of Policies and other Factors Affecting Metro Rates” (attached), showing a history of Metro’s transfer station rates “beginning when the earth cooled,” in Councilor Park’s words. The piece related rates to the allocation models used, regulatory changes, facilities that exist(ed), and solid waste industry history from 1979 to the present.
“For those of you who were here last year,” Mr. Anderson said, “...remember we went through a considerable amount of empirical work on Metro’s cost-of-service to compare the rates under a cost-of-service model with the rates that had preceded.” The Committee’s recommendation was such a substantial change to the rate structure that approximately half of that recommendation has been implemented. Tonight’s discussion was to serve a number of purposes, he explained. It was designed to give background to new members, and to establish a starting point for this year’s dialog for all involved. It was intended help the group pick up where the Committee ended last year, which excluded the “rate-and-policy balancing” analysis on the Committee’s work plan. Mr. Anderson noted that as often as the Committee met last year, time simply ran out due to the work load.
Summary of presentation, as supplied by Mr. Anderson:
The basic approach and thesis of the presentation was to describe the interrelationships among: (a) public policies on the disposal system; (b) the requirements placed on Metro by its two or three “hats”—as planner and implementer of state and local plans and mandates; as a disposal utility; and as a regulator; (c) the evolution of the economic, legal and technical environment in which Metro operated; and (d) Metro’s rate allocation structure.
In particular, the philosophy and design underlying the former rate model—in place from 1997 until the Committee’s recommendation and Council action last year—was tailored to the particular decision environment of the time. At SWAC and the Rate Review Committee in 1996 and 1997, there were good reasons to consider a significant revision of the RSWMP’s policy on reload facilities and “local” transfer stations. The preferred model at SWAC was a kind of “quasi-privatization” of the disposal market. But Metro was not positioned to entertain this option without serious concerns about the fiscal health of the public investment.
In 1997-98, Metro and SWAC had arrived at a solution, in which the public transfer stations would be positioned as “public goods”—for example, committing to long open hours to accommodate public customers, fully funding preventive maintenance and renewal and replacement so the stations could assure that disposal services would always be available (“disposal of last resort”), and so forth. These requirements were not to be placed on private facilities. In addition, Metro would reduce the legal requirements it had in place for licensing and franchising private facilities. In return, Metro would re-allocate the large, long-term fixed costs of the system that were undertaken to ensure regional disposal capacity, on behalf of the entire region. These costs would be re-allocated from the disposal charge at the transfer station to the Regional System Fee. (In 1997, these were the fixed payments to the transport and disposal contractors, and the debt service payment. The allocation of administration and overhead was simplified, so that they “followed the tonnage” and customer classes would pay in proportion to tonnage delivered to disposal sites. Metro has since negotiated-away the fixed disposal payment, and has pre-paid the transport payment. Of the major fixed costs, only the debt service remains.)
With the reallocation of these fixed costs to the regional tonnage base in 1997, Metro was relatively insulated from the fiscal impact of tonnage diversion, and the Council was better able to debate the quasi-privatization option on its merits as public policy. The policy was accepted and codified (Metro Code Chapter 5.01) in the summer of 1998. (Two additional details came rather late in the argument: Credits against the Regional System Fee to help the dry waste processing industry with a transition to the new economic environment which included significantly lower tip fees; and tonnage “caps” on new transfer stations.)
Approximately one year after adoption of the “public goods” rate model and shortly after adoption of the new regulatory code, three facilities—one reload and two dry waste MRFs (Pride Recycling, the facility now named Troutdale Transfer Station and WRI)—applied to become “local” transfer stations including the authorization to handle a limited amount of putrescible waste. A few, smaller facilities have come and gone since that time, but the system of disposal facilities as we know it now was largely in place by January 1999.
Councilor Park asked if the decision environment had changed, and if so, how. Mr. Anderson responded, not really; “…most changes have been a matter of degree, not kind. Public authority on flow control, for example, has been strengthened; but the fiscal environment remains analogous to 1998. A number of players have applied to enter the system—several dry waste facilities and currently at least one new local transfer station. As long as Metro’s fixed costs remained in the system fee, Metro’s ability to consider the merits of these new facilities was accompanied by a relatively small fiscal impact. The Rate Review Committee’s recommendation to re-allocate some of those costs back has the effect of amplifying the fiscal impact of tonnage diversion. Mr. Anderson added that his last statement was intended as completely analytical . Last year, the committee articulated its points in favor of the cost-of-service recommendation. “What we didn’t get to—what we ran out of time for—was a discussion of the pros and cons of the old model vs. the new cost-of-service approach, and how each performed against all these other system pressures and public policies (he indicated the time line on the wall).
In closing the timeline piece, Mr. Anderson said his purpose was to sketch out some groundwork for the Committee’s discussion this year. He added that the Chair has informed him he is very interested in hearing that discussion.
In answer to a question from Committee member Paul Matthews regarding the requirement that 90% of the Metro region’s waste be disposed at certain landfills, Mr. Anderson promised to supply the group with a one-page chart to illustrate the policy and how it is measured.
“One of the things to bring out,” Councilor Park noted, “is that policy changes that were made last year have made where the tonnage goes a lot more rate-sensitive. Basically, through the uniqueness of the structure, every ton that moves away from a Metro transfer station because of the contracts and fixed costs and so forth, drives the cost per ton up, which the local transfer stations then match. By doing some of the things we’ve done in the past, it has changed some of the dynamics.” He gave the floor to Ray Phelps for comment. Ray Phelps simply intoned, “I think before we discuss it again, you may want to check your facts, Councilor.”
Councilor Park asked for any questions before moving to the next agenda item. There followed a brief discussion of the budget; specifically the dissolution of the Budget Advisory Committee, which had been in place when Metro had an Executive Officer. Now that budget approval is contained solely within the Metro Council, that group is no longer essential, staff explained. Another change is that the rate now becomes effective each September, and Agency “...is going from a departmental budget to a programmatic budgeting exercise this year,” Solid Waste & Recycling Director Mike Hoglund added. “The Council is trying to line up programs both vertically - within departments - and across departments so we can look at priorities that way.”
Mr. Anderson handed out numeric illustrations showing how Metro computes its tip fee and the resultant effect of reallocating costs on operating margins at private facilities. He explained that these three tables were merely examples, intended as a quick primer on the rate structure itself. One of the consequences of the Rate Review Committee’s recommendation last year, Mr. Anderson said, was to shift costs, as shown in the second table. The third shows the effect on private facilities. “I suspect [this table] will be subject to comment;” he said, and his prescience proved correct.
Mr. Anderson briefly explained each of the graphs. “Our rate process,” he summarized the first, “is really no more complicated than looking at the budget and analyzing which ‘rate bucket’ those costs should go in: Transaction fee, disposal charge, Regional System Fee; or the “third fee” after we design it. Rates are simply the unit (or, “average”) cost obtained by dividing the cost by the number of transactions or tons.
The second graph, Mr. Anderson continued, showed the effect of $1 million allocation from the Regional System Fee to the disposal fee. The third graph, a supposition of the economic effect this reallocation might have on other facilities, sparked lively conversation. Councilor Park commented that he’s interested in how policy affects not only public, but the private side. “Where tonnage moves, there are winners and losers in the system other than the fact that the tonnage just moves,” he said.
After some questions regarding the figures, Mr. Anderson again said that the graph merely illustrated an example case. “It could be WRI,” Councilor Park commented to Mr. Phelps, “because you match Metro’s rates, don’t you?” Mr. Phelps nodded yes. The piece was just to illustrate a simple concept, the Councilor reiterated.
Discussion of the tables morphed into spirited dialogues regarding last year’s Committee attempt to “true-up” (Mr. Matthews’ phrase) a cost-of-services based rate, tonnage caps on private facilities, wasteshed calculations, and which should come first : The update of the Regional Solid Waste Management Plan, or disposal system planning.
Towards the end of these digressions, Mike Miller said, “I think it’s important for us to understand what drives the tonnage to move from one place to another, what the economic impacts are, and who they impact if Metro is going to make a policy to, in fact, cover their costs. That’s what we’re really trying to do: We’re trying to set a rate to cover Metro’s costs and allow them to operate. But if you don’t understand... what makes people move from one [facility] to another, you’re not going to be able to answer the question effectively.” Mr. Hoglund said that until the disposal system planning exercise is complete, focus would need to be more on cost centers.
The final subject became the role of the Rate Review Committee. Mr. Anderson related that President Bragdon has asked Councilor Park to look hard at the charge of the Committee after it gives a recommendation on the rate. “Council is interested in capitalizing on all of its committees to broaden and strengthen the actual advise and recommendations they get,” Mr. Anderson informed the group. Therefore, the charge of the Committee may be expanded in the future.
Briefly discussing scheduling, the Committee agreed to reconvene next week (Mr. Miller will be absent from the next meeting, Leichner will be tardy the next two weeks, and Mr. Matthews is unavailable on April 12th.)
Councilor Park adjourned the session at approximately 8:10 p.m.
Next meeting: Tuesday, March 22, 2005
6:00 p.m. Room 370A
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Attachment
T:\Remfma\committees\RRC\FY 05-06\RRC031505min.doc
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