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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
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.
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:
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
Finally, if a new residential contract is awarded, then customers would have an altogether new rate structure for FY 07-08.
The City may decline to grant WM an extraordinary rate increase for fuel. The City has the final choice.
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.
Approving the staff recommendations would:
Interim Director of Public Works
Attachment: Rate adjustment information
RATE ADJUSTMENT FORMULA EXPLANATION
The adjustment is based on a formula involving these factors:
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).