More on Franchised Waste Markets
David Davis, principal of MSW Consultants sent me an email about my previous Franchised Waste Market post. He also emailed me a white paper he wrote for the city of Monrovia, CA.
Graciously, David agreed to let me post an excerpt. Let me know what you think about his take!
Lower Rates than those in Cities with a Single Exclusive Hauler Rates for commercial refuse collection service in cities with non-exclusive systems are
typically lower than those in cities in which a single hauler provides exclusive service to both the residential and commercial sectors. This is mainly due to two factors: market pressure and ‘subsidization.’
First, in non-exclusive systems, there is continued downward competitive market pressure on rates. If a hauler increases its rates too much, the customer is usually able to readily switch to another service provider.6 As a result, the freemarket keeps rates in check.
However, commercial rates in cities that have a single hauler with a city-wide exclusive contract typically suffer from a phenomenon known as ‘subsidization.’ In these cities, the commercial rates often subsidize the residential rates.
This phenomenon typically occurs over time when a single hauler provides exclusive service to both the residential and commercial sectors, typically under a single contract. From the hauler’s profit-seeking perspective, it usually views the city as a whole. The hauler is typically indifferent as to how much of its profit comes from the residential or commercial sector, as long as the whole contract is profitable. Consequently, as rates are adjusted and the
contract re-negotiated over time, there is a tendency for the commercial rates to be increased more than the residential rates.
This tendency is caused by two factors. First, residential rates usually consist of one or two simple monthly charges that are charged to a large number of single family customers. These high-profile rates are easily understood and often compared to similar rates in nearby jurisdictions. However, commercial rates are more abstract, and are based on a more complicated matrix of the size and number of bins, and number of weekly pickups.
Consequently, residential rates are often subject to more scrutiny when they are adjusted or re-negotiated.
The second factor is the political nature of local government. There are simply more voters in the residential sector. Elected officials tend to represent the needs of their constituents, and more of their constituents are residential ratepayers. As a result, commercial rates tend to increase more over time than residential rates. Those commercial rates tend to be higher than the rates charged in non-exclusive systems, which are kept in check by market pressure.
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