MEETING SUMMARY
RATE REVIEW COMMITTEE
Metro Regional Center – Room 370
March 29, 2005
Present:
Members Metro Guests
Michelle Poyourow Councilor Rod Park, Chair Tom Koecher, Waste Mgmt
Matt Korot Mike Hoglund, Director, Solid Waste & Recycling Dean Kampfer, Waste Mgmt
Ray Phelps Doug Anderson, Solid Waste & Recycling Vince Gilbert, ECR
Mike Leichner Tom Chaimov, Solid Waste & Recycling Peter Gilbert, ECR
Paul Matthews Karen Feher, Finance & Admin. Services
Mike Miller Maria Roberts, Solid Waste & Recycling
Gina Cubbon, Administrative Secretary, SW&R
Members Absent:
- none-
Councilor Rod Park opened the meeting, and noted that a draft version of the meeting minutes for March 22 were available; he asked the members to look them over for any changes or corrections before next week’s meeting. The minutes from the March 15 meeting have been drafted but neither finalized nor distributed. They’re forthcoming.
The Councilor turned the floor over to Doug Anderson to continue discussion from last week. He referenced last week’s handout. As indicated at the last meeting, Council President Bragdon agreed to release the proposed budget numbers to the Committee; Mr. Anderson presented these to the group in the same format as last week’s handouts. An additional piece (all are attached) was a summary in more detail than discussed previously, for reference. He explained this piece, saying that it shows the operating budget only, and does not include capital budget, St. Johns Landfill Closure, etc. expenditures. The shaded portion, he added, “...are costs that used to be – prior to last year – recovered in the Regional System Fee, and would be moved to either the disposal charge or the transaction fee at the transfer stations [under the Committee’s cost-of-service recommendation]...” When fully-implemented (only about half of the new model was phased-in this year), the full implication of the model on the proposed budget for next year would be a shift of $3,129,586 from the Regional System Fee to Disposal.
Mr. Anderson expounded upon the other handout pages, which were identical to last week’s but with the newer numbers plugged in. He noted that the Metro Excise Tax is shown as going down under all models for FY 2005-06. This is because tonnage is up more than the CPI, and that has the effect of lowering the per-ton Excise Tax. Mr. Anderson also pointed out that on the sheet entitled “Economic Effect...” the “third fee” is not included, so that would have additional impact on private facilities.
Some members asked for a refresher on the significance of the “margins” spoken of in the Economic Effects table the previous week, Mr. Anderson again explained it to the group. “The effect on facilities’ operations are based on some simple but important assumptions,” he began. “When Metro posts its rate [referring first to the wet waste section], the assumption is that a wet-waste transfer facility will match Metro’s fee... If a facility matches that, assuming that the transaction fee is averaged over about an 8-ton load, then they will get an effective revenue of about $71.90 per ton, coming in. The assumption is that a ton in, is a ton out – no recovery, no water loss or gain. So when the facility sends that to a landfill, they will pay Regional System Fee and Excise Tax to Metro (the $23.60 cost listed in the table). So the margin between the revenue – if they match Metro’s rates – and the cost they pay when it’s landfilled is $48.23 under our current rate models.” That margin is the amount per ton with which private facilities cover all their costs as well as post a profit. If the rates change, Mr. Anderson continued, the margin changes accordingly.
Assumptions differ for dry waste operations for several reasons, including required recovery. Regardless, margins for both go ups increase under the full cost-of-service model.
Councilor Park asked if the scenario would change if the idea of mandatory dry waste MRFing went into effect (a concept to increase regional recovery that would require all dry waste loads go to a MRF – materials recovery facility – before being landfilled). Mr. Anderson said he felt the effect would be “uneven across the region... Hillsboro Landfill and Grabhorn would not be directly available as low-cost disposal sites if that were to happen. Then this assumption that some facilities would be able to more closely match Metro’s rates, that would of course increase their margins because it would run the revenue up, but would not change the costs, which are based on 30% recovery.” He asked the Committee members who represent the solid waste industry to address that scenario. Mr. Phelps said they could probably stay close to 25% recovery if there was mandatory MRFing, “...but 30% would be a memory.”
What if Hillsboro & Grabhorn were indeed no longer a factor in the market as they are now? Councilor Park asked. Mr. Phelps responded “I think that my facility [WRI] and I’m guessing Mike’s [Pride Disposal] – I think we may benefit more, because we’d be getting the waste that would be going to Lakeside... As a general statement, from the middle of Metro [region] east, it would have no effect at all... The point of the matter is that we’d geographically benefit because we’re residing near Lakeside. I’m being simplistic about it - I’m not getting into the market dynamic of competition, etc., etc.” Mike Leichner agreed with Mr. Phelps’ assertion.
At what point would haulers – under a mandatory MRFing situation – start using Metro Central? Councilor Park asked. Mr. Phelps and Mr. Leichner answered that it would largely be a matter of cost vs. time and distance, but a quick and simple idea could be gleaned by looking at a service area map. “What’s the traffic going to bear, and what’s the price going to be?” Mr. Phelps added. “I can’t answer that. None of us here will.”
Concluding his presentation, Mr. Anderson said that last year’s committee did a lot of work on the allocation model itself. The implication of that model, drawn out to next year’s budget, is what the handouts show. He asked if there was any other information the Committee might need, and opened the meeting to questions and discussion.
Mr. Anderson addressed a few questions regarding the formulas used to arrive at various figures, and the rationale for moving some of the allocations. Regarding the allocations change, he said, “In 1997, the Debt Service and other fixed costs were moved from an allocation to transfer stations to the Regional System Fee for a number of reasons. One of the reasons, germane to this conversation, was that Metro Council was on the verge of deciding whether or not to allow private facilities to begin handling significant amounts of putrescible waste (which had formerly been almost the sole province of Metro and Forest Grove.) The concern the Council had at that time was financial as well as contractual. With so many fixed costs in our rate base, the concern was if you gave away some of your rate base, it would put them fiscally at-risk. However, there were good policy reasons for allowing wet waste to go to other facilities – mostly, closer access. I remember [when WRI was permitted to take waste] in the Tualatin paper, there was a decrease in the residential rate that was directly tied to the transport savings because the waste could go closer. So the move from the transfer station base to the Regional System Fee was to minimize the fiscal hit to Metro and allowed Council to make the policy decision about sending wet waste around. They were really able to address the public policy issues, such as better access.”
“So why’s it being moved back?” Michelle Poyourow asked. Paul Matthews replied that it would be inappropriate for people who aren’t using a Metro transfer station to have to pay its debt service as well as paying rates of the facility where his garbage goes. In a sense, it double-charges because of a customer’s location, he said.
Mr. Korot interjected that while he understands that rationale on a cost allocation model, “But here’s a Council that made a decision in 1997 to have a policy override to that kind of consideration. So the Committee made their recommendation last year – did the Council last year say ‘we’re going away in a different policy direction than we decided in 1997?” Not completely, responded Mr. Matthews – there was a lot of compromise. “Keep in mind,” Mr. Matthews said, “...that the Debt Service is going away in 2009. We’re working on 2006 – we only have a few years, otherwise we’re going to have a rather dramatic change in the Regional System Fee when that Debt Service ends. We need to do something to phase it out or we’ll have a disruption of the whole price.”
Discussion ensued about what may happen when Debt Service is completed. Mr. Miller asked why it would be bad to have a drop of a few dollars in the tip fee at that time; Mr. Matthews said that part of the Committee’s charge has been to minimize drastic changes, phase them in so that it’s less disruptive – more predictable - to customers.
Mr. Phelps said that “...the public policy with regard to dealing with Debt Service was coupled with the idea that the private transfer stations would operate without a cap. And that never happened. So we’re operating at 50% capacity, with no capability of filling that capacity. We did get the Debt Service over there as a policy move, but the implementation of caps undercut the agreement with the private operators.”
Referring back to the Economic Effects handout, Mr. Matthews said, “I’m a little concerned that the discussion of ‘margins’ might be somewhat misleading.” He started talking math, pointing out that in a cost-of-service model, because the margins for the private facilities increase, local governments have an opportunity to pass that back to their citizens. “Essentially, when the local folks set the rates, they should be looking at the cost of disposal, and if the [increased margin] is beyond what their costs are, you shouldn’t let [facilities] pass that through.”
Mr. Korot agreed, saying, “This drives a need for a further look at disposal fees.” Currently, his jurisdiction makes assumptions using the Metro rate. “We don’t have numbers in front of us right now from the facilities – we have it from the hauling function, but not transfer stations.”
Mr. Matthews cautioned that using Metro as a proxy for the cost “is a dangerous thing because it’s not necessarily tied to costs. It could be vastly more profitable [at private facilities] than what we assume here.” Mr. Anderson said Mr. Matthews put his finger on an issue Councilor Park has been interested in: While the changes in rate allocations are being done for good public policy reasons at the recommendation of the Committee, “..they seem to be having these system effects, and are the system effects good public policy?” Mr. Anderson queried.
“If you were looking at that,” Councilor Park addressed Mr. Korot, “..what would you need? I mean – this is getting into some pretty dangerous territory; I can already see the odds of Ray letting somebody look at his books are pretty thin.” Mr. Phelps laughed, “No, not even close to pretty thin!”
Councilor Park continued, “I think what I’m hearing Mr. Matthews say is that if you’re going to run this full cost-of-service model out, then there are other things that potentially change whether you’re being serviced by a Metro station or a private station. You can come in an look at all the Metro costs and see exactly what they are, but you can’t at a private facility. But if you could, what would you be looking for?”
Mr. Korot supposed that a model could be what his jurisdiction does with the haulers.: Look for reasonable costs being claimed and establish reasonable profit on those costs. “On the hauling side, we look very deep into what the costs and revenues are. I’m not sure that’s the method to go here or not, but disposal costs are 25% of our total costs, so it’s significant, and if, as [Mr. Matthews] is pointing out, we may be taking a mistaken approach already that’s exacerbated by this [cost-of-service] model...”
While the Committee’s charge is to look at the Metro tip fee, Mr. Matthews offered, local governments have another responsibility. Mr. Anderson noted, however, that part of the Committee’s charge is to “...weigh your decision in the balance of all the policies that may come before the Council. Frankly, the cost to citizens is one thing the Council’s always been very interested in.”
Councilor Park mused aloud that as competition is being added to the system, he doesn’t understand why prices keep going up. Businesses commonly face a competitor by offering lower prices.
From the audience, ORRA’s Dave White said that “This gets really scary for me, working with haulers that deal with local governments when they set collection fees.... it implies that when we go to a yard debris processor [for instance] that somehow..... If the Metro tip fee is what’s becoming the standard, and all these other facilities set their rates based on that, yet some of the Metro tip fee is going to [for instance] sustainability, so they’re inflated and not really cost-of-service, they’re policy decisions that the elected officials have decided to fund, yet it’s being mirrored by these other facilities, then it’s a windfall is what you’re saying. And it’s scary for me if this conversation continues to go into... then the local governments have to start looking into our disposal costs, then say that some of your disposal cost isn’t allowed because it’s based on something Metro’s paying for but the facilities aren’t, so we’re not going to allow that to be paid. I think that’s what you’re saying.”
Mr. Matthews said that it’s just a matter he thinks local governments might want to look into, and the Committee probably wouldn’t be able to look at it, but if they can somehow help the local governments, it might be a good idea.
“The only comment I was going to make,” said Mr. Phelps, “..is that when you look at all the transfer stations, the least expensive operation is Metro’s. So if the local governments are going to try to look at something below that, they’re not going to find it.” Councilor Park said, however, that it depends on what the Council on the advice of the Committee puts into the rate - it could potentially have an effect. He said he was still grappling with the question, “Why – when you do the right thing, why does the price keep going the other direction? The consumer’s only paying the Debt Service once, not twice, but every time, the price keeps going up to the consumer. By shifting the cost off the private facilities over to the public facilities, theoretically it should be costing less [to the customer].”
Ms. Poyourow wondered, “How vigorous is the competition between private stations? If there were vigorous competition between the stations, then they wouldn’t be matching Metro’s fee, they’d be at marginal cost. So if they can match [Metro’s rate], that’s evidence of there not being very much competition,” whether because of geography or other costs.
Clarifying the Councilor’s point, Mr. Anderson said, “If nothing changed – cost, tonnage – and all we did was shift allocations, then Metro’s tip fee would go up because you’re moving costs from a bigger tonnage base [the entire system] to a smaller tonnage base [just Metro]. Then if everybody is able to match – and they do match – that disposal, with no other change in costs, then the cost to the rate-payer will rise.” This is an issue Council is very interested in; whether or not the effects of Metro’s rate on the system is good public policy.
Ms. Poyourow, Mr. Matthews, and Mr. Anderson discussed the subject of policy. Mr. Matthews maintained that this process wasn’t truly public; Mr. Anderson countered that the process is an open one, and stressed that the decision to partially privatize the solid waste system was very long and very public. “It was the most aired policy discussions in the time I’ve been here,” he said. “Ray’s right – an 11th-hour cap was an issue, but getting up to there, it was one of most aired discussions ever.
Councilor Park asked what Mr. Matthews feels is the charge of the Committee, if he doesn’t feel it reviews Metro’s rate-setting process. Mr. Matthews reviewed the charge, as presented at an earlier meeting. After some brief discussion, Councilor Park asked the group for their opinion about private facilities’ ability to raise revenue by matching Metro’s tip fee without adding any additional services or value. Is this a situation they feel is acceptable?
Mr. Phelps argued that because of regulations, there is no competition in the regional industry. “The caps keep me fixed. I can’t even let the public in my facility for fear of blowing the cap,” he said. Additionally, he said there are different groups of rate-payers and different services. “My costs go up every year like everyone else’s, but I can’t grow my tonnage the way Metro can grow its tonnage... that’s reflected in my tip fee [and the other private facilities]. The best you can hope for is that you’re going to have a tip fee equal to Metro’s, because Metro has costs, and I have costs, and my costs are different than Metro’s, and the same.” He talked about the years prior to the semi-privatization, and that being allowed to take some putrescible waste helped, but the caps prevent competition.
“Setting aside the discussion of caps,” Ms. Poyourow interjected, bringing the subject back to rate-setting, “...if this is the allocation model – if this has been recommended by this committee, and yet it results in this outcome – if we don’t think this is a good outcome, is it a policy problem? That policy might not be something the Committee should cover. She listed some of the different types of operations – landfills, Metro’s transfer stations, private transfer stations, and haulers. “Of course, Metro is regulated in that it’s a public organization so all of its cost are open to the public, and the haulers are regulated by local jurisdictions – so all of their books are open. But in the middle, we have an industry that is regulated insofar as there are caps, but it’s costs aren’t regulated the way that [the others] are. So the [local government] jurisdictions look at the haulers’ books but don’t have the capability to affect.... This sounds like a bigger problem than we can suggest in rate-setting. This sounds like a regulation problem. If you look at the whole industry vertically, there’s a hole in the middle where it’s not – or partly – regulated.” While not advocating that the facilities should be regulated, Ms. Poyourow commented that it seems unfair.
Mr. Phelps said that his customers were subsidizing Metro’s customers by paying the Regional System Fee, “representative of a cost that Metro really incurred to run its transfer stations, which should have been totally [allocated elsewhere]. So it was considered wise to move those costs to true cost-of service so that a transfer station that wanted to mirror Metro’s rates could economically and profitably do so.” If Metro had maintained its “Public Good” allocation model, Mr. Phelps said, private facilities would’ve had to raise their rates.
Councilor Park asked Mr. Korot what would happen if private facilities didn’t exist and all the tonnage went back to Metro or Forest Grove – what if that made tip fees go down but there was an increase in transportation costs, “You would go back and figure the tip fee plus a transportation amount, right?”
“We’d have that in real numbers,” Mr. Korot replied, “...because we’d have all the reported costs associated with truck and labor hours, gasoline and all that. Real costs.” The Councilor asked a few questions of the industry guests, and said that he wondered if no rate-setting regulation exists for private transfer stations, how do local governments figure out what are justifiable costs?
Mr. Leichner said a similar conversation happened with the City of Tigard a few years ago, and Pride had said they were welcome to come in and look at the entire operation, but that the company’s investment should also be considered. In the end, the City dropped the subject.
Discussion at this point wound back through policy issues, local government access to information for rate-setting, competition, and the tonnage caps. Ms. Poyourow commented “It seems that this shows there’s a problem at the transfer station level – whether that’s failure of competition due to caps, or insufficient regulation. That’s a big policy question.”
Councilor Park said, for the sake of “...keeping history correct: When these private transfer stations came into the market, they were dry [waste] only.” (Mr. Leichner corrected that his facility was wet and dry from the start.) Acknowledging this, the Councilor continued: “That was how they came into the system, they knew what the game was at that particular time. Over a period of time, for other policy reasons, wet waste was allowed at those particular stations.” Mr. Phelps reiterated that the tonnage caps came in at the time of the wet waste allowance.
Mr. Matthews asked Mr. Korot if there is a legal reason that local governments don’t look into their hauler’s disposal costs. “I know what the disposal costs are,” Mr. Korot replied. “I know what the haulers pay – I don’t know what’s built into the rate that the facilities pay.” Local governments can ask facilities to see their costs, but there don’t seem to be regulations compelling facilities to acquiesce. This caused some very spirited discussion about differing regulatory requirements within the system.
To Mr. Korot, Mr. Matthews said, “I don’t think this [issue] is in this Committee’s purview. I think it’s your job. And whether or not you can [look at facilities’ records], maybe we can do things that can help you, I don’t know. Why should we leave the local jurisdictions out there hanging? Maybe the Rate Review Committee could become a resource to you.”
Mr. White countered that local governments review rates “every day.” Mr. Matthews continued, “But there seems to be – if you just look over all the entire region – there seems to be a hole in the logic. If regulation at that level was being done, and we had a mechanism for doing it....”
“Or if competition were hearty....” Ms. Poyourow interjected.
“You’ll never have competition like that because of the nature of garbage,” Mr. Matthews said. “It’s heavy stuff, it’s not worth a lot.... To me, I’m not sure that having a bunch of transfer stations scattered around competing with each other is necessarily the best public policy, either.”
Mr. Phelps countered that “...until there is a complete competitive environment of the transfer stations, you’re going to get some weird answers [if facility costs are looked into] because everything is distorted because the free-flow of competition isn’t occurring,” referring again to the caps. He continued that “you ought to at least have the cost-of-service [model] for the 800-lb. gorilla that’s driving the whole thing, and that’s Metro.”
Mr. Miller spoke up, saying that there are two processes going on: One is the budget and its needs. “Then you have a whole series of policy questions – how are you going to recover those costs? Which tons are you going to include in those costs? Who’s going to pay them and at what level?” Additionally, he said, there’s a policy issue of “...whether Metro’s going to be in or out of the competitive market.” He went on to maintain that Metro needs to get in or get out.
“Even if they get out, you still have this issue,” Mr. Matthews said.
“No you don’t,” Mr. Miller replied.
“Yes, you do,” Mr. Matthews ascertained. “Once you’ve got vertical integration, you’ve got the issue... If you’re vertically integrated and you’re having to transfer things back and forth, you don’t know what the true cost is. And if you’re trying to regulate people and you don’t know what the cost of disposal is, you have a blind spot in your regulation, and that causes a problem, regardless of Metro’s being in or out.”
The next conflict centered around Metro’s and local governments’ regulatory roles within the system. “Right now, it’d be a little incongruous for Metro to regulate their competitors,” Mr. Phelps said, quipping, “It’d be like McDonald’s setting the rate for hamburgers. Wendy’s would be a little unhappy.” Mr. Matthews pointed out that a competitive framework is being applied to something that is not always subject to competition. He reiterated that the local governments would still be uninformed regarding transfer facilities’ costs even without Metro’s transfer stations. “You would still have the issue for the local regulators to know whether or not the charges coming from the local transfer stations are consistent with the costs for the citizens.”
Mr. Miller said that in a truly free market, the market would regulate that. Mr. Matthews disagreed, however, and several people spoke over one another.
Councilor Park asked Mr. Korot to supply him with information regarding how local governments set rates. In a different system, he added, what would jurisdictions need to know to make it work? To Mr. Matthews, the Councilor said, “As a rate regulator, there are elements you’d be looking for...” He requested that Mr. Matthews come back with some of that information. The system could change drastically in 2009, after Debt Service is paid, he continued. He’s interested in what pieces would be needed to create a change.
Mr. Korot said that currently, “There’s no great science – we’re making a kind of back-of-the-envelope calculation. [For instance] there’s no value added to the customer for hauling [waste] over to Vancouver, so we bring it back to the Metro fee. It’s roughly equivalent to going to Oregon City [Metro South].”
Mr. White stressed that the hauling industry has been pushing for a move to cost-of-service. “What really scares us, is that at the end of a rate review process, an elected official would say ‘We’ve applied the cost of service, but politically, we don’t think that rate is going to be supported, and we don’t want phone calls, so we won’t implement it.” He continued, asserting that others might want collection rates to be set artificially high because it increases recycling. Disagreeing, Mr. Korot said that Mr. White’s statement didn’t reflect what officials are elected to do, which is, he said, “...to serve the best interests of their [constituency].”
Mr. Kampfer added that he, too, thinks Metro should go with a straight cost-of-service model. Mr. Phelps agreed, and commented that “If there’s a policy issue, there’s the franchise fee to make a few bucks on, and Metro’s got the Excise Tax. There are ways beyond the true cost-of-service to take some money out of the solid waste system for solid waste uses as a systems cost that’s not directly related to service.”
Mr. Hoglund spoke up: “My personal opinion, as I’m listening here – and it’s not a Metro position... By 2009, I think we might all be in agreement, that by that time, we should have a cost-of-service model for Metro’s rates. I think we’re dancing around this issue of what happened in 1995-98,” when Metro was completely a public system, and being asked by the industry to loosen the reins. Metro’s concern, he continued, was that they’d made a big investment with public funds, and wanted to protect that investment. Therefore a cost-of-service model was not used then. Instead, the explicit policy was that private facilities – in order to become part of the system – would agree to help pay part of the Debt Service. “Ray, you’re right,” Mr. Hoglund said, “...at the last-minute, these caps came on, and it all evolves around those decisions that were made, and whether or not Council wants to rectify that situation. You claim you’re stuck because you have a cap, maybe the Rate Review Committee could say that we all need to share in the additional tons. We’re getting more tons, so our costs are coming down a little... I just keep looking back at when we went from – as you said, Mike – [Metro] went from all in, to this half-way system, and we may have a different system [in 2009].” That’s staff charge over the next 18 months, to look at a different system. “But we’re not going to get to that all in or all out in the next month, while this committee’s working.”
After short discussion, Councilor Park stated that what he’s trying to find is “Where does the handoff occur between Metro and the local governments? What do we need to provide you [to Mr. Korot] for you to be able to do your jobs, and vice-versa.” The Councilor and Mr. Phelps volleyed opposing opinions about what would happen to rates if, for instance, the tonnage caps were doubled. Mr. Miller enjoined, “If Metro has less tons, Metro’s tip fee is going to go up. Now – the assumption is that all the private transfer stations are going to mirror that rate. Your conundrum is that you don’t regulate their rates, and you can’t do a thing about it.”
Mr. Matthews turned away from the “in or out” subject, reminding the group that last year, a specific policy question was how to deal with the Debt Service. “We kicked it around and came up with a specific proposal – stranded costs - splitting it in that manner. It seemed to fit, and the Committee liked it.” He said that if policy questions are specific, it’s easier for the Committee to address them, “As opposed to ‘what do we do about leakage from the system’... that’s hard for this committee to address.”
Agreeing, Ms. Poyourow added, “I think the question of how much – and how – to regulate a potentially non-competitive industry, that’s too broad a question.” Still, Mr. Matthews said he’s not opposed to looking at what might happen to the Rate if caps were doubled.
Councilor Park and Mr. Anderson wrapped things up and reminded the group that only two scheduled meetings remain to set a recommendation if it is to be submitted with the proposed budget. Mr. Matthews and Ms. Poyourow expressed interest in working on the “third fee” concept in that time.
The meeting adjourned at 8:12 p.m.
Next meeting: Tuesday, April 5, 2005
6:00 p.m. Room 370A
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T:\Remfma\committees\RRC\FY 05-06\RRC032905min.doc
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