Executive Summary

Background

Existing Waste Disposal Agreement

2001 Rate Setting Process

Review of Audited Financial Statements

Survey of Bay Area Jurisdictions

Policy Analysis and Recommendations

Attachment I: PDF Help
Survey Results - Residential Refuse Rates
Survey Results - Commercial Refuse Rates

Attachment II:
Descriptive Information by Jurisdiction of Survey Results

 

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BOARD OF SUPERVISORS

BUDGET ANALYST

1390 Market Street, Suite 1025, San Francisco, CA 94102 (415) 554-7642
FAX (415) 252-0461

February 14, 2002

Honorable Tom Ammiano, President
and Members of the Board of Supervisors
City and County of San Francisco
Room 244, City Hall
1 Dr. Carlton B. Goodlett Place
San Francisco, CA 94102-4689

Dear President Ammiano:

Pursuant to a motion approved by the Board of Supervisors on September 17, 2001, transmitted herewith is the Budget Analyst"s report on (a) the Refuse Rate Application Process, and (b) the 2001 residential refuse rate increases. This report also includes the Budget Analyst"s expedited review of the financial statements for the San Francisco operations of Norcal Waste Systems, Inc, (Norcal Companies). These Norcal Companies consist of the Sunset Scavenger Company, the Golden Gate Disposal & Recycling Company and the Sanitary Fill Company. Finally, this report contains the results of a comparative survey conducted by the Budget Analyst of the rates and procedures for regulating both residential and commercial refuse collection in 38 jurisdictions in the San Francisco Bay Area.

An Initiative Ordinance, approved by the San Francisco voters in 1932, is the law that dictates how garbage is collected and disposed of, how permits and licenses are issued and how refuse rates are established in San Francisco. In accordance with this 1932 Ordinance, residential refuse rates are specifically subject to a City rate review process and commercial refuse rates are subject to agreements between the City"s permitted and licensed refuse collector and the individual commercial producers of the refuse. Any changes to the provisions contained in this 1932 Initiative Ordinance are subject to voter approval.

In FY 1987-1988, the Board of Supervisors approved the existing Waste Disposal Agreement, designating the Norcal Company-owned transfer station, located on Tunnel Road across U.S. Highway 101 from Candlestick Park and the Altamont landfill, owned by Waste Management, Inc. in Alameda County, as the exclusive disposal facilities for the City. The transfer station is used to sort and transfer the refuse from the individual Norcal Company garbage collection trucks to the Norcal Company larger, longer haul trucks that are used to transport the refuse to the Altamont landfill. In San Francisco, Norcal Waste System, Inc. includes the Sunset Scavenger Company, the Golden Gate Disposal & Recycling Company and the Sanitary Fill Company. The Sanitary Fill Company is owned equally by the Golden Gate Disposal & Recycling Company and the Sunset Scavenger Company, which are both wholly owned subsidiaries of Norcal Waste Systems, Inc., which in turn is wholly owned by the Norcal Waste Systems, Employee Stock Ownership Plan (ESOP). Sunset Scavenger collects primarily residential refuse, serving the majority of the City and Golden Gate Disposal collects primarily commercial refuse, serving the northeastern portion of the City. Sanitary Fill is responsible for the disposal of all of San Francisco"s waste, through the transfer station, to the Altamont landfill.

The Waste Disposal Agreement is in effect for up to 65 years or until 15.0 million tons of solid waste are deposited to the Altamont landfill site. Based on current estimates of San Francisco"s disposal rates to the landfill site, this Agreement will expire in an estimated 9 to 12 years. Board of Supervisors hearings are anticipated to be held in the near future to discuss the City"s future waste disposal plans.

In 2001, in response to an application from the Norcal Companies for a 58 percent residential refuse rate increase, the San Francisco Rate Board approved a 27 percent rate increase in the residential monthly refuse rates effective July 1, 2001, increasing the basic monthly residential rates from $11.68 to $14.83 per 32-gallon can, an increase of $3.15 per can per month in the first rate year of a five-year rate plan increase. In accordance with the 1932 Initiative Ordinance, the Rate Board is comprised of the City Administrator (formerly the Chief Administrative Officer), who acts as the Chair, the Controller and the General Manager of the Public Utilities Commission (PUC). Overall, the Rate Board authorized that by the fifth year, or by June 30, 2006, the base monthly rate per 32-gallon can will increase to $16.65, which is $4.97 or 42.6 percent greater than the $11.68 rate in effect prior to July 1, 2001. The Rate Board also approved a cost-of-living adjustment to be applied to these refuse rates, from 2002 through 2006, such that automatic rate increases will occur over the next five years, without the requirement of further rate setting hearings.

To establish these rates, in the 2001 rate review process, the Rate Board maintained Sunset Scavenger"s and Sanitary Fill"s financial operating ratios at 91.55 percent, which corresponds to approximately an 8.45 percent annual profit for each company. In accordance with the 1932 Initiative Ordinance, the refuse rates must be "just and reasonable". The City uses a ratemaking formula called an operating ratio, to provide the regulated garbage companies with adequate funds to pay their expenses plus receive a profit, to determine that the rates are just and reasonable. The operating ratio is a formula that compares the companies" annual projected expenses to their annual projected revenues for ratemaking purposes. The City has established an operating ratio of 91.55 percent, which, on a simplified basis, allows the companies to make an annual profit margin of 8.45 percent (100% minus 91.55%).

The Budget Analyst"s review of the audited financial statements and financial data found that, as reported as part of the 2001 Rate Application, the regulated companies, Sunset Scavenger and Sanitary Fill, actually achieved better than the 91.55 percent operating ratio, as set by the City, or an average annual profit margin of 8.45 percent, over the past five years. In fact, between 1996 and 2000, Sunset Scavenger actually realized average annual profit margins of 10.86 percent. Thus, over the five-year period from 1996 through 2000, Sunset Scavenger actually achieved an average annual profit of 28.5 percent more than the profit margin established in the operating ratio formula set by the City. The Sanitary Fill Company realized average annual profit margins of 15.84 percent, or 87.5 percent more than the rate set by the City.¹

Even more significant, between 1996 and 2000, Golden Gate Disposal achieved average annual profit margins of 27.24 percent, from primarily commercial refuse collection operations. It should be noted that the City has no regulatory authority over commercial refuse rates. In accordance with the 1932 Initiative Ordinance, such commercial refuse rates are subject to agreements between the City"s permitted and licensed refuse collectors (Sunset Scavenger and Golden Gate Disposal) and the individual commercial producers of the refuse (i.e., commercial tenants and building owners). It should be noted that in many cases, it is the commercial building owners that actually pay the commercial refuse fees to Sunset Scavenger and Golden Gate Disposal. Normally, if tenants occupy such buildings for commercial purposes, the commercial refuse fees are passed on to the tenants as part of the overall rent and operating costs; as a result, it is likely that many commercial tenants do not know how much they are actually paying for commercial refuse collection.

The Budget Analyst"s reviews of the financial statements found that during 1999 and 2000, Golden Gate Disposal, which collects primarily commercial refuse, was able to pay $2,153,862 in direct subsidies to Sunset Scavenger"s recycling operations and yet still maintain their 27.24 percent profit margin, which is, as noted below, a profit margin of 164 percent greater than the average annual profit margin reported in the 25 Bay Area jurisdictions that use operating ratio data. In addition, the financial data submitted for 2002 through 2006 disclosed that Golden Gate Disposal is projected to pay approximately an additional $20 million of subsidies to Sunset Scavenger, which can then use such subsidies to maintain lower refuse collection rates for residential customers. However, typically residential users together with commercial users are actually paying for the higher commercial rates imposed on the commercial customers because businesses typically pass on all of their costs to consumers. Furthermore, the commercial customers are required to pay whatever rates the San Francisco commercial refuse collection companies impose, since the two Norcal Companies, namely Sunset Scavenger and Golden Gate Disposal, have a refuse collection monopoly in San Francisco. Since the City does not review or regulate the commercial rates, there is therefore no outlet for local businesses to protest or complain pertaining to their commercial refuse rates.

In fact, on February 11, 2002, the Budget Analyst, for audit procedure purposes, called Golden Gate Disposal"s Customer Service telephone number to attempt to complain about commercial refuse collection and commercial refuse rates and to inquire how to lodge a complaint with an outside party, such as the City and County of San Francisco, if a customer were not satisfied with commercial services or rates. Golden Gate Disposal"s customer service representative offered to either take the complaint directly, or, alternatively, provide the Budget Analyst with a City and County of San Francisco contact telephone number that would allegedly take such complaints. The Budget Analyst called the City number, only to be informed that the Budget Analyst had contacted the Department of Public Work"s Street Cleaning Division, and that that Division did not handle such commercial refuse complaints. The Street Cleaning Division employee then directed the Budget Analyst back to Golden Gate Disposal to lodge the complaint. The Budget Analyst then called Golden Gate Disposal back, contacted the same customer information representative, who then admitted that there was nobody to call at the City and County of San Francisco for purposes of placing such a complaint.

However, it is interesting to note that Section 249.6 of the City"s Business and Taxation Code requires a Department of Public Health annual license fee of $2,273 to be paid to the Tax Collector for each garbage truck operating in the City. In accordance with these provisions, such license fees are intended to be used for the inspection and licensing of refuse vehicles and adjudicating refuse collection rate disputes (emphasis added). The responsibilities for adjudicating such refuse collection rate disputes are with the Department of Public Health"s (DPH) Environmental Health Division. The Budget Analyst therefore contacted the general telephone number for the DPH"s Environmental Health Division, only to be informed that if a customer wanted to lodge a complaint regarding refuse rates, the customer should contact the refuse company directly. Only after repeatedly assuring the City employee on the telephone that their Division did handle such complaints, was the Budget Analyst transferred to an employee within the DPH"s Environmental Health Division to take such complaint.

Based on discussions with the DPH"s Environmental Health Division, although they can take complaints from both residential and commercial customers, the DPH telephone number is only listed on the residential refuse rate bills, and is not listed on the commercial refuse rate bills. Furthermore, based on the experience of the Budget Analyst, it would appear virtually impossible for any business to find the DPH"s Environmental Health Division telephone number, in order to place such a complaint. And lastly, even if a commercial refuse customer was able to contact the DPH"s Environmental Health Division regarding high commercial rates, since the City does not regulate commercial rates, there would be little that the City could do.

Our survey of 38 Bay Area jurisdictions (excluding San Francisco), found that unlike San Francisco (a) all jurisdictions have entered into franchise agreements or other long-term contractual arrangements with private refuse haulers for the provision of residential and commercial refuse collection, and (b) all jurisdictions regulate residential rates and all jurisdictions, except two, regulate commercial refuse rates. The only two cities that do not regulate commercial rates are the City of Los Altos Hills, which has no commercial businesses, and the City of San Jose, which has a competitive commercial market, with 23 commercial refuse collectors operating in the City. Similar to San Francisco, 25 of the 38 jurisdictions rely on operating ratios to determine refuse rates However, unlike San Francisco, all 25 of these jurisdictions use their operating ratios to establish both residential and commercial rates.

In contrast, the City of San Francisco (a) under the provisions of the 1932 Ordinance, issues licenses and permits for refuse collection and does not have any franchise or contract agreements with the existing collection companies, Sunset Scavenger, which collects primarily residential refuse, or Golden Gate Disposal, which collects primarily commercial refuse and (b) regulates only residential refuse rates, and does not regulate commercial refuse rates. Furthermore, although San Francisco uses an operating ratio to establish refuse rates, the operating ratio formula is only applied to the residential rates and not to the commercial rates.

A list of the 38 jurisdictions is as follows: Cities of Alameda, Atherton, Belmont, Burlingame, Campbell, Cupertino, Danville, East Palo Alto, Foster City, Gilroy, Hillsborough, Lafayette, Livermore, Los Altos, Los Gatos, Milpitas, Menlo Park, Moraga, Morgan Hill, Mountain View, Napa, Oakland, Orinda, Pacifica, Palo Alto, Redwood City, San Carlos, San Jose, San Leandro, San Mateo, Santa Clara, Santa Rosa, Saratoga, Sunnyvale, Walnut Creek, the Town of Los Altos Hills, and the unincorporated areas of Contra Costa County and San Mateo County.

San Francisco"s recently set residential refuse rates are comparable to the 38 other surveyed jurisdictions, ranging from 5.13 percent below the average monthly rates of the surveyed jurisdictions for one 30-35 gallon can, to 2.09 percent higher than the average for a 60-64 gallon can (or two 32-gallon cans), as shown in the Table below. In addition, San Francisco"s established residential operating ratio of 91.55 percent is well within the range of between 85.0 percent and 96.0 percent for the 25 other jurisdictions that use operating ratios to determine residential refuse rates. However, as shown in Table 1 below, San Francisco"s established operating ratio of 91.55 percent is approximately 2.09 percent higher than the average and .60 percent higher than the median operating ratios for these other jurisdictions.

Table 1

Sunset Scavenger"s actual average operating ratios for the five-year period between 1996 and 2000 was 89.14 percent, which is 0.60 percent less than the average reported operating ratios of 89.68 percent for the 25 other Bay Area jurisdictions that use operating ratio formulas that were surveyed by the Budget Analyst. This means that Sunset Scavenger actually realized a 5.23 percent greater profit than the profit margins established in the 25 other Bay Area jurisdictions. Similarly, Sanitary Fill"s actual average operating ratio for the five-year period between 1996 and 2000 was 84.16 percent, or 6.16 percent lower than the average reported operating ratios of 89.68 percent for the 25 other Bay Area jurisdictions. This means that Sanitary Fill actually achieved a 53.5 percent greater profit than the profit margins established in these 25 other Bay Area jurisdictions. It should be noted that in the survey conducted by the Budget Analyst, the Budget Analyst obtained the operating ratio data, and the related refuse rates, that were set by the individual jurisdictions and did not obtain data on the actual operating ratios or profit margins subsequently realized by the individual refuse companies in these other jurisdictions.

Regarding commercial rates, which are not regulated in San Francisco, the Budget Analyst"s survey results found that San Francisco"s published commercial rate of $114.86 per month for one cubic yard of waste is 45.90 percent higher than the average for the 37 surveyed jurisdictions (excludes Los Altos Hills), as shown in Table 2 below:

Table 2

*The average, median and range of operating ratios shown in Table 2 above reflect the ratios reported by other jurisdictions in their rate setting formulas. In contrast, because San Francisco does not regulate commercial rates, the operating ratio shown for San Francisco is the actual operating ratio over the last five years achieved by the Golden Gate Disposal & Recycling Company, the primary commercial refuse hauler.

Not only are San Francisco"s commercial rates significantly higher than the average of all the other surveyed jurisdictions, only four of the 38 jurisdictions surveyed, as detailed in Attachment I, actually had higher commercial rates than San Francisco. Of these four jurisdictions, one (the City of Napa) is currently addressing the rate issue with a competitive bid process and the other three jurisdictions, (the Cities of East Palo Alto, Orinda and the unincorporated areas of Contra Costa County) have uniquely different characteristics, such as additional City-imposed surcharges and requirements and very low density developments, that might justify such higher rates. Golden Gate Disposal, which provides primarily commercial operations for San Francisco, realized an average annual operating ratio of 72.76 percent over the past five years, which reflects an average annual profit of approximately 27.24 percent, the highest reported in the Bay Area.

As shown in Tables 1 and 2, the operating ratios for the 25 Bay Area jurisdictions that use operating ratios is the same for both residential and commercial refuse services. As shown in Tables 1 and 2 above, the average operating ratio in these 25 surveyed jurisdictions is 89.68 percent, or a profit margin of 10.32 percent. Therefore, as shown in Table 2 above, Golden Gate Disposal"s actual operating ratio of 72.76 percent is 18.87 percent lower than the average of the 25 surveyed Bay Area jurisdictions. Another way of explaining this difference is that Golden Gate Disposal"s actual average 27.24 percent annual profit margin is 164 percent greater than the average annual profit margin of 10.32 percent of the 25 Bay Area jurisdictions that reported operating ratio data.

Based on this review, the Budget Analyst has identified the following six policy issues and has made the following recommendations:

(1) Since the only two refuse companies currently licensed and permitted to operate in San Francisco, Sunset Scavenger Company and Golden Gate Disposal & Recycling Company, are currently owned by one major company, Norcal Waste System, Inc., a private monopoly is essentially in effect. This monopoly occurred during the 1980s, when Norcal acquired both of these refuse collection companies, which were previously independently licensed and permitted to operate in the City. According to the City Attorney"s Office, in accordance with the 1932 Initiative Ordinance, the San Francisco Department of Public Health can issue multiple permits and licenses for other garbage companies to operate and collect refuse in San Francisco. However, until the existing Waste Disposal Agreement expires, which will occur when 15 million tons of solid waste have been deposited in the Altamont landfill site, estimated to occur in the next 9 to 12 years, the financial feasibility for other refuse companies to collect refuse in San Francisco is uncertain. To foster a more competitive environment, the Budget Analyst recommends that the City"s Department of Public Health more openly encourage other refuse companies to seek licenses and permits to collect refuse in San Francisco.

(2) The City"s existing Waste Disposal Agreement designates the Sanitary Fill Company, which is owned by both Sunset Scavenger and Golden Gate Disposal (Norcal Companies), as the sole entity that can receive and dispose of all San Francisco solid waste, specifying that all such waste be delivered to the Norcal-owned transfer station, located on Tunnel Road, across U.S Highway 101 from Candlestick Park. The City is therefore currently limited to exclusive use of these transfer station and disposal facilities, neither of which are under the City"s ownership or direct control. This Waste Disposal Agreement, between the City, the Sanitary Fill Company and Waste Management is anticipated to expire in the next 9 to 12 years, when 15.0 million tons of refuse are estimated to be deposited in the Altamont landfill. The Budget Analyst recommends that the Board of Supervisors immediately explore future mechanisms for assuming control of the transfer station requesting that various City departments and divisions (i.e., the City Attorney, the Department of Public Works (DPW), the Real Estate Division) research and study the potential financial and legal mechanisms to acquire and manage the transfer station for the City.

(3) In accordance with the 1932 Ordinance, only residential refuse collection rates are subject to the City"s rate review. The refuse rate review is conducted by the Director of DPW and the City"s Rate Board, which, in accordance with the 1932 Ordinance, consists of the City Administrator, the Controller and the General Manager of the PUC. Under current law, the Board of Supervisors has no authority to approve or disapprove decisions of the City"s Rate Board. Currently, the DPW Director and the Rate Board also do not have any authority to regulate commercial rates.

To set the residential rates, San Francisco has historically relied on the operating and financial data submitted by only the Sunset Scavenger Company, which is responsible for a majority of the residential refuse collection services in the City. As noted above, the Budget Analyst"s survey results found that all of the 38 surveyed jurisdictions regulate residential refuse rates, but that, unlike San Francisco, which has no authority to regulate commercial refuse rates, 36 of the 38 Bay Area jurisdictions surveyed also regulate commercial refuse rates. Only the Town of Los Altos Hills, which does not have any commercial businesses and the City of San Jose, which has a highly competitive commercial refuse environment, do not regulate commercial refuse rates. Not surprisingly, the Budget Analyst"s survey results found that except for the Cities of East Palo Alto, Napa, and Orinda and the unincorporated areas of Contra Costa County, San Francisco commercial customers currently pay the highest refuse collection rates in the entire Bay Area, or rates that are 45.9 percent higher than the average of the 37 other jurisdictions. As a result, Golden Gate Disposal, which serves primarily commercial customers, achieved an average five year annual profit margin of 27.24 percent, the highest in the Bay Area. This 27.24 percent annual profit margin is approximately 164 percent more than the average annual profit margin of 10.32 percent of the 25 Bay Area jurisdictions that reported operating ratio data.

However, even though commercial refuse rates are not regulated by the City, it is the same Norcal Companies that provide commercial refuse collection and disposal services, under the same negotiated labor contracts, providing the same benefits, with the same trucks, and in fact, along many of the same routes as the residential refuse services, that are regulated by the City. Although both of the collection companies, namely Sunset Scavenger and Golden Gate Disposal, have residential and commercial customers, in setting the residential rates, San Francisco has historically relied only on the operating and financial data for Sunset Scavenger Company, which is responsible for a greater proportion of the residential services in the City.

The Budget Analyst recommends that (a) to be consistent with the preferred practices of nearly every other Bay Area jurisdiction, (b) to accurately reflect that two refuse collection companies in San Francisco, namely Sunset Scavenger and Golden Gate Disposal, serve both residential and commercial customers, (c) to enable a full disclosure of the facts during the rate review process of the profit margins realized and the potential subsidies made by the refuse collection companies, and (d) to permit more realistic customer refuse rates to be established, the Director of the DPW and the Rate Board should review the entire range of operating and financial data of residential and commercial operations for both the Sunset Scavenger and the Golden Gate Disposal refuse collection Companies. This should be accomplished immediately through the Director of DPW requiring Norcal Waste Systems, Inc. to segregate all of its residential costs from its commercial costs. Such segregation of costs is not presently submitted to the Director of DPW or to the Rate Board. At the same time, the Board of Supervisors should submit an Ordinance to the electorate to amend the 1932 Initiative Ordinance to require the City, through its rate review process, to regulate commercial refuse rates, consistent with other Bay Area jurisdictions, in addition to the City"s present authority to regulate residential refuse rates. The Director of DPW and the City"s Rate Board should then require that all of the San Francisco-based Norcal collection and disposal companies submit combined financial and operating data for purposes of the rate review process.

(4) Each of the 38 jurisdictions surveyed by the Budget Analyst have either franchise agreements or other contractual agreements with their private haulers to collect refuse. Under these franchise and other contractual agreements, 35 of the 38 Bay Area jurisdictions also collect franchise fees from the refuse collection companies. Such franchise fees are used for various recycling and other General Fund municipal purposes. Contrary to the 38 jurisdictions surveyed, San Francisco is the only jurisdiction in the Bay Area that does not have any formalized contractual agreements with the City"s refuse collection companies. As previously noted, the Department of Public Health simply issues licenses and permits to the refuse collection companies, but no other formalized contractual agreements between the City and the refuse collection companies exist. Although San Francisco has a Norcal-funded Impound Account to pay for related solid waste management activities, San Francisco does not collect any franchise fees from the refuse collection companies. In fact, the City pays approximately $4 million of annual commercial refuse fees to Sunset Scavenger and Golden Gate Disposal for refuse collection services provided to various City departments. Most of this approximately $4 million annual cost is paid from General Fund revenues.

The actual process that other jurisdictions use to select the specific refuse collection companies varies, including the use of competitive bidding, negotiated agreements and non-exclusive contracts with numerous haulers. San Francisco"s procedures have not changed, in accordance with the 1932 Ordinance, which provides for the Department of Public Health"s issuance of licenses and permits for a refuse collection company to operate. The Budget Analyst recommends that the Board of Supervisors review alternative mechanisms for selecting future refuse collectors, including a requirement that franchise or contractual agreements be executed between the City and the refuse collection companies. Such alternatives could include the payment of franchise fees to the City, the use of a competitive bid process, negotiated separate agreements or entering into non-exclusive agreements with multiple refuse collectors.

(5) Although DPW has followed the public notice requirements for the DPW public hearings and the Rate Board hearings, and has even provided additional public notices, one of the issues appealed to the Rate Board was the lack of public notification of the Rate Hearings. Given the potential magnitude of pending refuse rate increases on virtually every household in the City, the Budget Analyst recommends that the refuse collection companies that are requesting refuse rate changes be required to notify each ratepayer by mail regarding such proposed refuse rate changes.

(6) The 1932 Initiative Ordinance"s strict timing requirements, coupled with the significant volumes of technical material that are submitted by the applicant (which is generally the refuse collection company), and the numerous consultant studies, financial reports and detailed staff analyses, make the entire refuse Rate Review process in San Francisco extremely technical, cumbersome and difficult for the general public to review and comprehend. This is coupled with the fact that no new evidence may be presented at the Rate Board hearings that was not already presented before the Director of the DPW. Given the public"s frustration with the ability to participate in the City"s rate review process, a temporary City public interest attorney or refuse expert should be retained by the Director of DPW and the City"s Rate Board to advocate on behalf of the City"s ratepayers.

Respectfully submitted,

Harvey M. Rose
Budget Analyst

cc: Supervisor Daly
Supervisor Gonzalez
Supervisor Hall
Supervisor Leno
Supervisor Maxwell
Supervisor McGoldrick
Supervisor Newsom
Supervisor Peskin
Supervisor Sandoval
Supervisor Yee
Clerk of the Board
Controller
City Administrator
General Manager of the PUC
Director of DPW
Tina Olson
Robert Haley
Ben Rosenfield
Ted Lakey
Mark Lomele, Norcal Chief Financial Officer