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.
Franchise Waste Collection Areas
Many communities in California and Florida provide special challenges to organizations looking to reduce their waste disposal and recycling expenses. In fact, many organizations upon learning they are in a franchised market simply give up.
What is a Franchise Waste Collection Area?
Here is a compare and contrast I excerpted from Los Angeles:
Current Open-Market System
Solid waste collection services are provided through an open-market system in which each resident directly arranges for services with the hauler. Although many waste haulers are doing a good job, this system has been unable to meet demands created by changes in Federal and State laws, public attitudes toward protecting the environment, and consumers’ demands for better services and protection against excessive rate increases.
Proposed Franchise System
The new franchise system will provide residents with ways to dispose of solid waste in an environmentally-friendly way. Haulers selected to provide solid waste collection services are required to enter into a franchise agreement with the County based on specific terms and conditions. The agreements are based on services expressed by the community and are designed to improve customer service, increase accountability, promote cleaner neighborhoods, and regulate rates charged by haulers.
Benefits of Franchise System
The franchise system is designed to provide uniform service standards for haulers operating in each franchise area. The system provides each community with the flexibility needed to create services that will benefit area residents. These features are modified to reflect feedback received through survey cards, community meetings, and telephone calls. This interactive process allows the County to tailor each agreement to meet the needs voiced by each community. The franchise system also benefits the community by limiting the wear and tear on County streets, assists the County in meeting the State’s waste reduction mandate, and reduces the need for new landfills.
To me this definition is vague. Essentially franchise waste collection areas serve to reduce the number of garbage trucks driving around town and ensure a greater amount of compliance for the community.
What this means for an organization is that they have a difficult time negotiating rates because there is no competition. The rates have been determined by the local government. This is widely true, but not always. You have to make a few calls to double check.
Since most people’s idea of waste cost reduction is simply rate negotiations, you can see why they give up when confronted with a franchised market. However, waste reduction and recycling is still wide open and can provide a a big cost reduction.
Keep in mind that recycling rates are most often lower than waste disposal rates and recyling more can net you a win. Then there are other methods of reducing the frequency of pick ups that will drive down costs.
To be honest, these projects take some elbow grease and often busy managers never find the time to do their best. In short franchise markets are a great place to get a third party involved. OK, that’s a plug, but it’s the reality.
