Rancho Palos Verdes City Council
   

JUNE 6, 2006 RESIDENTIAL SOLID WASTE AND RECYCLING RATE ADJUSTMENTS FOR WASTE MANAGEMENT OF LOS ANGELES FOR FY 06-07 JUNE 6, 2006 RESIDENTIAL SOLID WASTE AND RECYCLING RATE ADJUSTMENTS FOR WASTE MANAGEMENT OF LOS ANGELES FOR FY 06-07
JUNE 6, 2006 RESIDENTIAL SOLID WASTE AND RECYCLING RATE ADJUSTMENTS FOR WASTE MANAGEMENT OF LOS ANGELES FOR FY 06-07

TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL

FROM: DIRECTOR OF PUBLIC WORKS

DATE: JUNE 6, 2006

SUBJECT: RESIDENTIAL SOLID WASTE AND RECYCLING RATE ADJUSTMENTS FOR WASTE MANAGEMENT OF LOS ANGELES FOR FY 06-07

Staff Coordinator: Lauren Ramezani, Sr. Administrative Analyst

RECOMMENDATION

  1. Approve the maximum rate that Waste Management of Los Angeles can charge single-family customers in FY 06-07.
  2. Approve the maximum rate that Waste Management of Los Angeles can charge multi-family customers in FY 06-07.
  3. Increase the City’s FY 06-07 Collector Fee by $13,595.
  4. Approve Waste Management of Los Angeles’s request for a one-time extraordinary rate increase for fuel in the amount of $0.26 per month per single-family customer, and $0.26 per month per multi-family account.
  5. Increase the City’s Collector Fee, reflecting the one-time extraordinary rate increase for fuel, in the amount of $165.____
  6. Approve Universal Waste Systems, Inc.’s (UWS) request to waive their annual rate adjustment; maintain UWS’s FY 06-07 rates for single-family and multi-family and City Collector Fee, at the same level as in FY 05-06.

BACKGROUND

Waste Management of Los Angeles (WM) is in the sixth year of its seven-year exclusive residential agreement that has been in effect since July 2000. Per the terms of the agreement, the City must be notified of annual adjustments by the first of April each year for possible rate changes to be effective the first of July of that year. A Notice of this Public Hearing was published in the Palos Verdes Peninsula News on May 27, and June 1, 2006.

Universal Waste Systems, Inc. has notified staff that they will forgo their annual rate adjustment and will keep their FY 06-07 rates for single family and multi family accounts the same as FY 05-06. As a result there will be no increase in UWS’s City’s Collector Fee paid to the City by UWS in FY 06-07.

DISCUSSION

Per their agreement with the City, WM is eligible for a maximum FY 06-07 rate increase of 4.27% for single-family and 4.33% for multi-family accounts. The maximum amount of the increase is spelled out in the agreement and is a function of the percentage change in the disposal tipping fee per ton, the percentage change in the Producer Price Index (PPI) and WM's actual service revenue and disposal expense. Staff finds the calculations accurate and per the agreement's formula.

The history of WM single-family twice a week curbside rates and adjustments are as follows: The current contract that went into effect in July 2000 had a two-year rate freeze, therefore, the FY 00-02 rates remained at $19.10/month. In FY 02-03 there was a rate reduction of 0.67% and rates went down to $18.97/month. In FY 03-04 there was a 1.2% rate increase and rates increased to $19.20/month. In FY 04-05 there was a 2.95% rate increase and rates increased to $19.77/month. In FY 05-06 there was a 2.87% increase and rates increased to $20.34/month. This year’s proposed increase, which is higher than previous years, could be attributed to overall increase in disposal costs, cost of living/PPI, etc.

There are approximately 10,800 single-family and 40 multi-family accounts serviced by WM. This maximum rate increase would be approximately $0.87 a month, or an annual increase of $10.44 for the majority of single-family customers (twice a week curbside). The rates for customers in the pilot automated program are the same as customers in the rest of the City.

For the multi-family accounts, the amount varies depending on the service level. For example, for a twice a week 3 cubic yard bin customer, the maximum monthly increase would be $4.39 a month, or an annual increase of $52.68.

The exact maximum rate increase and proposed maximum monthly rates for all service levels is listed on the attached spreadsheets. Rate calculations for WM’s most popular services are as follows:

Service Level

S/F= Single-family

M/F= Multi-Family

Current Max. Monthly Rates

Proposed Max. Monthly Rate Increase

Proposed Max. Monthly Rate for FY 06-07

S/F Curbside 2x/wk

$20.34

$0.87

$21.21

S/F Pup Route 2x/wk

$24.37

$1.04

$25.41

S/F Backyard 2x/wk

$25.65

$1.10

$26.75

S/F Low Income 1x/wk

$15.96

$0.68

$16.64

M/F 2x/wk, 3 cubic yard Bin

$101.57

$4.39

$105.96

COLLECTOR FEE: WM currently pays the City an annual Collector Fee of $318,395. The agreement automatically results in the Collector Fee increasing by the same percentage as the rate increase. If staff's recommendations are approved, the City's Collector Fee would increase from $318,395 to $331,990 (or by $13,595) in FY 06-07 and would be distributed among three funds. Approximately 56% of the Collector Fee would be deposited in the General Fund- Various Programs ($185,915), 32% of the collector fee would be deposited in the General Fund- Stormwater Quality Program ($106,235), and 12% in the Beautification Fund ($39,840). This City Council approved this Collector Fee distribution in May 2003.

EXRAORDINARY ADJUSTMENTS: The City’s agreement allows for extraordinary adjustments under certain conditions such as disposal/gate rate increases, and changes in State and local government solid waste fees and charges. In addition to the annual rate adjustment, WM has also requested an extraordinary rate adjustment (extra) to compensate them for fuel/diesel price increases. This is WM’s first such extra request. (See attached backup)

WM initially requested an increase in the amount of $0.34 per month per customer. Staff discussed this request with the City Attorney’s office. Staff was advised that although fuel prices qualify for the extraordinary adjustment, however, per the agreement’s language: a) WM is not automatically entitled to that adjustment, and 2) the City is not obligated to grant the request. Further, if the City was to consider the request, WM was to submit documentation substantiating their claim of increased fuel costs.

Staff and SCS Engineers (the City’s solid waste consultant) have reviewed the rate increase and supporting documentations submitted by WM, and had meetings and further discussion with WM. Staff was concerned about accounting twice for the fuel cost increases, once through the regular PPI adjustment, and the second through the extraordinary fuel rate adjustment.

WM pointed out that although fuel (energy) is a component of the PPI, however, the PPI prices include only producer’s costs. In the PPI, all costs related to energy are related to the manufacturing of goods. No distribution/transportation costs are included in the PPI. Waste collection and transportation for disposal and processing should include a distribution transportation cost; the fuel component istherefore the diesel fuel is not properly addressed in the PPI (finished goods)..

Staff recommends that the fuel increase be calculated based on the proportion of WM's rates that is related to fuel (collection/routes and transportation for disposal) versus the proportion that is non-fuel related (insurance, labor, equipment, containers, landfill costs).  Staff discussed this with WM, and WM concurs with staff’s recommendation.

Staff’s recommendation would result in a new monthly curbside rate of $21.47 per customer ($21.21 for PPI and $0.26 for fuel).  This is in comparison to WM’s initial proposed rate of $21.55 per customer ($21.21 for PPI and $0.34 for fuel).  The single-family customer and the multi-family account would each see a $0.26/month surcharge in their billing. That would be a one-time annual increase of $3.12 per customer/ account, or a 1.2% rate increase for fuel.

Furthermore, the extra cost is a one-time only increase. If the current WM residential contract gets extended, neither future rates, nor the future Collector Fee would include the extra fuel rate component. Next year’s (FY 07-08) rate adjustment would be based on the regular rate of $21.21 not $21.47. However, if the fuel prices continue to rise or stay high throughout next year, WM has informed staff that they might have to address
the fuel price increases again.

Finally, if a new residential contract is awarded, then customers would have an altogether new rate structure for FY 07-08.

ALTERNATIVE

The City may decline to grant WM an extraordinary rate increase for fuel. The City has the final choice.

CONCLUSION

Approving the staff recommendations would increase the maximum residential rate for Waste Management of Los Angeles customers. The maximum monthly single-family rates would increase by 4.27%, and the maximum monthly multi-family rates would increase by 4.33%. The increase would be effective July 1, 2006. The City Collector Fee would automatically increase by $13,595 and would be distributed among several City funds.

Staff also recommends approving a one-time extraordinary rate increase for fuel in the amount of $0.26 per month per customer/account. This would increase the City’s Collector fee for one-time in FY 06-07 for fuel in the amount of $165.

UWS has waived their annual rate adjustment and their customers would see no rate increases in FY 06-07. Similarly, the City’s Collector Fee paid by UWS would also remain the same as in FY 05-06.

FISCAL IMPACT

Approving the staff recommendations would:

  • Increase Waste Management's single-family customers’ maximum monthly rates for FY 06-07 by 4.27%.
  • Increase Waste Management's multi-family customers’ maximum monthly rates for FY 06-07 by 4.33%.
  • Automatically increase the City's FY 06-07 Collector Fee by $13,595, which would be distributed by the previously approved ratio among General Fund- Various Programs, General Fund- Stormwater Quality Program and Beautification Fund.
  • Increase Waste Management’s single-family customers and multi-family accounts maximum monthly rates for one-time for FY 06-07, in the amount of $0.26 per month per customer/account.
  • Automatically increase the City’s Collector Fee for one-time for fuel costs by $165, which would be distributed similar to the regular Collector Fee.
  • No changes in UWS’s rates. UWS customers would have the same monthly rates as in FY 05-06. Accordingly, the City’s annual Collector Fee paid by UWS in FY 06-07 would remain unchanged at $13,045.

Respectfully Submitted:

Raymond Holland

Interim Director of Public Works

Reviewed by:

Les Evans

City Manager

Attachment: Rate adjustment information

ATTACHMENT

RATE ADJUSTMENT FORMULA EXPLANATION

The adjustment is based on a formula involving these factors:

  • Actual service revenue and disposal expense
    • The total disposal expense and total rate revenue of the hauler is for the twelve-month period ending on the most recent December 31. i.e. January 1, 2005 through December 31, 2005.
  • Producer Price Index (PPI) for Finished Goods
    • The percentage change in the PPI is for the twelve-month period ending on the most recent December 31. i.e. December 2005 vs. December 2004.
    • Percentage change in PPI is multiplied by 75%. This helps reduce rate increases.
    • The PPI was selected as the indicator in the contract, instead of the Consumer Price Index (CPI), because the PPI more closely tracks changes and places greater emphasis on items like cost of labor and durable manufacturing equipment rather than consumer goods like food or housing. Additionally, in recent history the PPI changes have increased at a lower rate than the CPI.
    • In calculating percentage change in PPI, preliminary December numbers for both years are consistently used.
  • Disposal tipping fee per ton
    • The percentage change in the solid waste disposal tipping fee is based on the change between the most recent tipping fee on which rates were based in FY 04-05 and the new tipping fee in FY 05-06.
    • If, however, the haulers are the owner/operator of the disposal site/s, then the maximum annual increase in the tipping fee is equal to the annual percentage change in the PPI. This affects Waste Management and limits the rate increase.
    • Waste Management took 73% of the total single-family and 68% of the total multi-family disposed waste to company owned landfills such as Bradley and El Sobrante. The remaining 27% and 32% of the waste, respectively, was disposed at a non-company owned facility, SERRF (a waste to energy transformation facility in Long Beach owned and operated by the City of Long Beach). Therefore, a weighted average of these disposal facilities was used in the calculations. Since SERRF raised rates in FY 05-06, SERRF related tonnage showed a tipping fee increase, while Waste Management owned facility tonnage was restricted by the percentage in PPI increase.

ATTACHMENT

EXTRAORDINARY FUEL ADJUSTMENT

The average diesel price index per the U.S. Department of Energy, Energy Information Administration was 209.41 in 2004. This index rose to 260.38 in 2005. The index of 209.41 means $2.09 per gallon for a No. 2 diesel. Similarly, 260.38 means $2.60 per gallon for a No.2 diesel.

260.38 –209.41=50.97 change (or $0.51 increase per gallon)

50.97/209.41= 24% change

There was a 24% increase in the average price of diesel in one year.

To eliminate any questions whether there is double counting for fuel by using both PPI and extraordinary costs: staff recommends that the fuel increase be calculated based only on the proportion of WM's rates that is related to fuel (collection/routes and transportation for disposal), and the PPI increase be assessed only on the non-fuel related portion of the fee versus the proportion that is non-fuel related (insurance, labor, equipment, containers, landfill costs). 

For the single-family residential rate, based on the information provided by WM, it is calculated that the fuel portion of the rate amounts to $1.40 of the existing $20.34 charged per home.

This is based on the gallons used per month, multiplied by the cost per gallon in 2004.  The remainder of the present rate, $18.94, is non-fuel related.  Staff recommends that the 24% increase in fuel from 2004 to 2005 be assessed on the $1.40 fuel portion of the rate, for a rate of $1.73 per household per month. 

Similarly, the 4.27% PPI increase would be assessed on the $18.94 non-fuel portion of the rate, for a rate of $19.74 per household.  This would result in a new rate of $21.47 per household.  The customer will see a $0.26/ month surcharge, or a 1.2% increase. WM concurs with these calculations.

This is in comparison to the WM’s initial proposed rate of $21.55 per household ($21.21 for PPI and $0.34 for fuel).