By
Constance Hornig
This is
the third in a series of articles identifying issues
frequently raised in procuring, negotiating, and drafting
MSW service contracts. Collectively these articles will
constitute a practical contract manual that describes
approaches MSW service providers and local governments
can take to share risk and reward,and reach a mutually
satisfactory agreement.
The hauler's marginal cost of collecting and disposing
of additional refuse containers is relatively small,
and its profit might be relatively greater. Charging
proportionately higher costs (a.k.a. variable rates)
for an extra refuse container might provide the customer
with the economic incentive to increase his or her recycling
efforts in order to reduce his or her refuse bill. But
it also might have the opposite effect on a hauler
whose incremental cost for the extra container is relatively
small and who therefore realizes a greater rate of return
on that extra container. Consider that the hauler already
has invested the capital in the collection vehicle and
the fixed operating costs in running the route and the
incremental disposal per-ton tipping fee for those gallons
is small.
The hauler's profit margin on the extra refuse container
(e.g., a 90-gallon container) likely will be relatively
greater than the profit margin on the first container
included in a base service complement (e.g., 60-gallon
refuse, 60-gallon recycling, and 90-gallon greenwaste
containers). The hauler might have a real, if subtle,
economic motivation to maximize disposal, not
diversion. This is especially true if the hauler is
disposing of the refuse at its own disposal facility
but is not processing recyclables at its own material
recovery facility (i.e., is not internalizing its waste).
It might have added incentive to dispose of incremental
tonnage; however, this motivation might be moderated
by the hauler's additional contractual incentives to
divert.
Consider any countervailing contractual incentives
to divert. The hauler's scope of services in
its collection agreement may contain public recycling
and waste-reduction education requirements. These vary,
from stringent specificity (visiting an enumerated list
of schools' fourth-grade classes annually, hiring dedicated
education personnel for specified hours per week, spending
a prescribed education budget, preparing identified
bill inserts and newsletters, attending community fairs,
and speaking at named community organizations, such
as Rotary International or Chamber of Commerce) to decidedly
vague public outreach directives. If the latter is the
case, public-education performance requirements might
not supersede the incremental disposal return.
The collection contract might also contain a diversion
performance standard that, if breached, could trigger
a default and remedies, including termination. It correspondingly
might require an intermediary, less drastic remedy of
liquidated damages for failure to meet diversion guaranties.
Alternatively, the collection contract might provide
not only that stick but also a carrot. The hauler's
compensation can be based on the amount of measured
diversion it accomplishes, both incentives (increased
compensation for superdiversion in excess of minimum
performance requirements) and disincentives (decreased
compensation for lower levels of diversion). (The measurement
protocol should be detailed, including allocation for
routes that commingle contract waste with noncontract
or extrajurisdictional materials and materials-processing-facility
allocation protocols for residue attribution.)
Diversion standards and a fiscal reward/punishment provide
the hauler with incentive to divert. They might be more
compelling than the incremental marginal return on the
extra variably priced container. But if the hauler already
is meeting its diversion guaranty and/or earning its
maximum diversion-incentive payment or if the hauler
does not have those contractual requirements or incentives,
the incremental, marginal return might discourage the
hauler from pressing generator customers to achieve
higher diversion levels. This can be countered without
sacrificing generator incentives.
Charge generators variable rates to discourage
disposal, but pay the hauler a service fee commensurate
with cost and reasonable profit. Rates payable
by the generator customer need not equal the service-fee
compensation earned by or paid to the hauler. In fact,
you presently might have assorted MSW management and
recycling fees included in your rates that you collect
to fund your administration costs or that your hauler
collects on your behalf and remits to you.
If you collect rates through utility bills, property
taxes, or other means, you can structure variable rates
to influence generator-customer behavior, remit to your
hauler its compensation portion of those rates, and
keep the balance to invest in recycling programs.
If your hauler collects those rates, it can retain its
compensation and advance the balance to you. In that
event, consider establishing payment protocols that
protect your money from the hauler's creditors, such
as language clarifying that rate collection is a part
of the hauler's scope of service; that the hauler is
collecting rates on your behalf; that, where possible,
the hauler is depositing those rates into a separate
account held for your benefit; and that it secures a
fidelity bond or crime insurance. (Even better would
be the hauler making checks payable to you or having
the hauler enter payments into its billing records,
with you paying the hauler compensation and retaining
the balance as if you did the billing yourself.) Secure
payment of those moneys with payment bonds and/or articulate
compensatory damages in amounts equal to those sums
that arguably could be recovered by draws on a letter
of credit or a performance bond.
For simplicity of evaluating competitive service-fee
proposals on an apples-to-apples basis, you might make
assumptions on hauler compensation calculated off the
base capacity refuse/recyclables/greenwaste cart complement
rather than solicit proposer bids on every possible
cart-subscription configuration. For example, require
a base service-fee proposal for a 60-gallon refuse,
a 60-gallon recycling, and a 90-gallon greenwaste complement
and then prescribe a decreased percentage of the service-fee
proposal for a 30-gallon refuse complement or an increased
percentage of the service-fee proposal for a 90-gallon
refuse complement. The proposers should take into account
the prescribed percentages when pricing the base service-fee
proposal.
Competitive procurements might minimize any container
inventory issues. If you unilaterally can set
rates to generator-customers, in theory you will influence
the distribution of containers. If you raise the price
of the incremental container sufficiently, customers
will switch to extra recycling or greenwaste containers.
The hauler will have to swap refuse containers for recycling
or greenwaste containers that it might or might not
have in its existing inventory. If customer subscription
changes are dramatic, routing (and related capital investment
in vehicles) might be affected. The risk of container
inventory and subscription changes commonly lies with
the contractor. That is, the hauler considers the base
service package (e.g., 60-gallon refuse, 60-gallon recycling,
and 90-gallon greenwaste containers) and other options
(e.g., 30- or 90-gallon refuse, recycling, or greenwaste
containers with or without customer surcharge), past
customer demand and container subscription, socioeconomic
profile of the population, and so on. The hauler then
orders the cart-capacity complement it deems sufficient
and establishes refuse/recycling/greenwaste routes based
on its experience. In the competitive procurement environment,
there is precedent for haulers assuming the risk of
capital investment consequent on changes in the variable-rate
structure controlled by the local government.
In sum, if you are considering variable-rate pricing
to encourage customer recycling, also consider asymmetrical
customer-rate/contractor-service fees. Invest the difference
between the rates and the service-fee compensation in
recycling programs. Where possible, competitively procure
the contracts (and service fees). To simplify proposal
evaluation, request base service-fee proposals and prescribe
decrements or increments.
Author Constance Hornig, Esq., heads her own law firm
in Los Angeles, CA.
MSW
- May/June 2004
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