As the costs of solid waste and recycling operations continue to rise and state and federal governments add more stringent regulations, many local governments are delegating their collection operations to private industry. However, since solid waste management is a public service, local governments still have the responsibility to ensure that the citizens receive the highest quality of service for the lowest possible cost. Many governments are fulfilling this responsibility by granting franchise collection contracts and regulating collection rates. An important aspect of any collection service contract is the need to include a realistic rate adjustment methodology.
The overall rate paid by the customer should consist of two basic charges.
There are two main issues in dealing with collection rate adjustments; when is an adjustment due and how much should it be. These issues are an important part of structuring a collection contract. If both issues are not clearly addressed in the contract, lengthy and adversarial annual rate negotiations can result.
Collection rate adjustments can be given at any time during the life of the contract. The majority are given annually on the anniversary date.
There are several methods for addressing how much a rate adjustment should be. One approach utilizes the net income of the collector as the basis for the rate adjustment. Examples of these methods are the Return on Investment (ROI) approach, the Return on Equity (ROE) approach and the Guaranteed Profit (GP) approach. Using any of these methods can result in rewarding an inefficient collector (one whose operating methods have resulted in a low net income) by increasing the rates to his customers, while penalizing an efficient collector (one achieving a higher net income through the use of good management techniques).
Another rate adjustment method in use in many areas is the Consumer Price Index (CPI) approach. This method, while sound in its logic, is somewhat flawed in its implementation because the CPI includes the effect of cost changes in many goods and services which have no direct effect on solid waste collection services. For instance, an increase in the cost of housing and food has no direct influence on the cost of collection operations. As a result, collection rates may increase at a time when collectors’ costs are not rising, or the rates may not increase when collectors’ costs are increasing significantly.
The RRI is a price indexing method designed specifically for adjusting collection rates. The RRI is based on various national indices that are directly applicable to the direct costs of the collector.
Here’s how it works. Periodically (normally annually), in a format prescribed by the contract, the collector submits financial information which separates its cost of operations into five major categories. Based on its particular value as a percentage value as a percentage of total cost, each category is weighted. Each category is associated with a specific national index and the change in that index is calculated for the appropriate period. The change in each index is then multiplied by the “weight factor” for the appropriate category. The sum of the results is the adjustment factor (the RRI) for that period. The current collection rate is then multiplied by the new RRI to establish the new collection rate.
The answer is unequivocally – maybe.
The RRI has historically been lower than the CPI and has occasionally produced a rate decrease. But that is not why SCS Management Services uses it. The reason we use the RRI is that it produces a fair and equitable rate adjustment. The RRI includes only those economic changes that directly affect solid waste and recycling collection costs, rather than those that affect the entire economy. The RRI does not grant a collector a 5 percent rate increase if the main component of a rising economy is food prices! Conversely, if fuel costs rise dramatically, the rate adjustment is higher because collection costs are directly affected. No one benefits if collectors are forced to close their business or allow the quality of service to deteriorate because of insufficient rates.
In order to be fair to the customers and the collectors, the RRI increases (or decreases) the collection rate based on changes in the cost categories that are specific to the collection business.
Just as the economy affects each of us in a different manner, it also has different effects on various types of businesses. The RRI isolates these differences and uses only indices that affect solid waste and recycling collection operations. This results in collection rates that are adjusted in an efficient and equitable manner.
SCS Management Services is a division of SCS Engineers, an independent, employee-owned environmental consulting firm specializing in solid waste management. SCS has offices nationwide providing services to clients across the country.
For more information about how SCS Management Services™ can assist you in utilizing the Refuse Rate Index (RRI) in your collection contracts, contact us at Service@SCSEngineers.com.