Norcal Financial Statements And Related Survey Results_Report
Background
On November 8, 1932, the voters of San Francisco approved an Initiative Ordinance entitled the Refuse Collection and Disposal Ordinance3. This 1932 Ordinance is the law that dictates how garbage is collected and disposed of, how permits and licenses are issued and how rates are established in San Francisco. This Ordinance specifically provides for the (1) collection and disposal of refuse in San Francisco, (2) licensing of refuse collectors by the Director of Public Health, (3) division of the City into collection routes, (4) maximum rates for residential collection, (5) procedures for changing these rates, and (6) penalties for the violation of these provisions.
This Ordinance provides that any person, firm or corporation wishing to transport, collect or dispose of refuse in San Francisco must obtain a license from the Director of Public Health. In addition to this license, a refuse collector must have a permit to operate on specific designated routes in the City from the Director of Public Health. In fact, the 1932 Ordinance designates 97 specific routes on an attached City map. The Norcal Companies currently have a permit to operate each of these 97 routes. In accordance with this Ordinance, these permits are not exclusive and one or more persons, firms or corporations may be given a permit to collect on the same route4.
The 1932 Ordinance also establishes the procedures for adjusting residential refuse rates through the creation of the City"s Rate Board, which consists 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). Under current law, the Board of Supervisors has no authority to approve or disapprove decisions of the City"s Rate Board. In accordance with the 1932 Ordinance, an application for any increase, decrease or change in the rates can be submitted by any person, firm or corporation affected by the rates to the Chair of the Rate Board, who in turn, refers the application to the Director of Public Works. Within 30 days, the Director of Public Works must begin public hearings on the application, including issuing a public notice of the time and place of the public hearings at least 20 days prior to the date of the hearing. The applicant, City staff and the public then participate in these hearings and may submit oral and written testimony and evidence and be cross-examined. The Director of Public Works may also conduct any studies and investigations deemed pertinent to the application.
At the conclusion of the Director of Public Works public hearing, and within 90 days after receiving the application, the Director of Public Works must file a Report and Recommended Order regarding the requested rate changes with the Chair of the Rate Board. The Chair of the Rate Board is then responsible for publicly noticing the Recommended Order. The applicant or any person, firm or corporation affected by the application may file any objections to the Recommended Order with the Rate Board. If no objections are filed, the Director of Public Works" Recommended Order becomes final and takes effect. If any objections are filed, then the Rate Board must hear these specific objections. In accordance with the 1932 Ordinance, no new evidence may be presented to the Rate Board. Instead, presentations to the Rate Board, whether in writing or presented orally at the hearings, must rely on evidence and facts already presented before the Director of DPW. The Rate Board must then grant or deny the objections in whole or in part within 60 days of the date of filing of the Director of Public Work"s Report and Recommended Order.
The Ordinance also provides that such rates must be "just and reasonable". Historically, the City has used a ratemaking formula, called an operating ratio (OR)5, that provides the garbage collection company with adequate funds to pay their expenses plus receive a fair profit margin to determine that the rates are "just and reasonable". Currently, the City allows the regulated Norcal Companies (Sunset Scavenger and Sanitary Fill) an operating ratio of 91.55 percent, or an annual profit margin of 8.45 percent. Using the established operating ratio, and estimates of revenues and expenses, the residential rates are then set by the City prospectively. Once the rates are set, there is no later review by the City to determine whether or not the garbage company actually achieved the established operating ratios.
All of the rates and charges for residential refuse collection and disposal services are specifically subject to the rate review process outlined in this 1932 Ordinance.6 In contrast to residential rates, the rates and charges for non-residential (commercial) services are specified in the 1932 Ordinance as subject to agreement between the City permitted and licensed refuse collector and the individual producers of the refuse. Thus, the City does not regulate commercial rates. Any changes to the provisions contained in the 1932 Initiative Ordinance would be subject to voter approval in San Francisco.
Existing Waste Disposal Agreement
Section 5 of the 1932 Ordinance provides that refuse collected by refuse collectors in the City will be disposed of by persons, firms or corporations and in manners or by methods designated by the Board of Supervisors. In 1986, the Board of Supervisors approved an ordinance (File 57-86-4.2) which authorized the Chief Administrative Officer to enter into an agreement with the Sanitary Fill Company and Waste Management, Inc. of Alameda County for transfer and disposal of San Francisco"s refuse. This agreement designated the Sanitary Fill Company as the sole entity to receive and dispose of all San Francisco solid waste, specifying that all such refuse shall be delivered to the Company"s transfer station, located on Tunnel Road, across U.S. Highway 101 from Candlestick Park, and then subsequently transferred to the sole disposal site at the Altamont landfill in Alameda County, which is now owned by Waste Management, Inc. The transfer station is used to sort and transfer the refuse from the individual Norcal Company garbage collection trucks to the Norcal Company longer haul and larger trucks that are used to transport the refuse to the Altamont landfill.
This Waste Disposal Agreement became effective on November 1, 1988, and provides that for up to 65 years or until 15.0 million tons of solid waste from San Francisco are deposited in the Altamont landfill site, whichever comes first, the City is restricted to exclusive use of these transfer station and disposal facilities.Based on estimates provided by the Department of Public Works,as of September 30, 2001, the City had deposited 8,327,402 tons of refuse to the Altamont landfill, leaving a remaining 6,672,598 tons, or an estimated 9 to 12 years, depending on future disposal levels, until the expiration of this agreement. In the next few months, hearings are anticipated to be scheduled before the Board of Supervisors to review the status of the current Altamont landfill site, the existing Waste Disposal Agreement, the remaining capacity of the landfill and plans for future waste disposal for San Francisco.
This Waste Disposal Agreement also (1) directed the Director of Public Works to recommend to the Rate Board the costs, fees, charges and expenses anticipated by the Agreement 7 and (2) established a 1.3 percent surcharge on all residential and commercial billings to create a special reserve fund of $15,000,000 to address any unanticipated future liabilities.
2001 Rate Setting Process
On January 29, 2001, the Sunset Scavenger Company, the Golden Gate Disposal & Recycling Company and the Sanitary Fill Company, (the Norcal Companies) submitted an application to the Chair of the Rate Board requesting various adjustments in refuse collection and disposal rates, to be effective July 1, 2001. Initially, the Norcal Companies requested a 57.78 percent increase from $11.68 per 32-gallon can to $18.43 per 32-gallon can. During the rate review process, the Norcal Companies revised their application to request a 52.29 percent increase in the residential monthly base rate from $11.68 per 32-gallon can to $17.79 per 32-gallon can. These rates include the costs under the Waste Disposal Agreement to transport and dispose of the waste. Although the Norcal Companies application included the operating ratio formula previously established of 91.55 percent, or a profit margin of 8.45 percent, in the 2001 application, the Norcal Companies also requested an 88 percent operating ratio, or a 12 percent annual profit margin.
After advertising the hearings in the San Francisco Independent on February 3, 2001 and posting notices at the San Francisco Main Library and on the DPW website, the Director of Public Works held the first of a series of public hearings on February 26, 2001 and March 1, 2001. During the first two days of hearings, the Norcal Companies presented their application and City staff (Department of Public Works, Solid Waste Management and City Attorney) and their consultants cross-examined the Norcal representatives. The Director of DPW also received hundreds of letters and emails expressing various opinions on the proposed application. On March 9, 2001, Norcal slightly revised their application through the submittal of a document entitled "Corrections and Revisions to the Rate Application".
On March 30, 2001, the DPW and Solid Waste Management Program staff, assisted by the City Attorney"s Office, issued a 42-page Staff Report that presented analysis and an evaluation of the Norcal Companies application. The Staff Report recommended, among other provisions, a 21.75 percent increase in the residential monthly base rate per 32-gallon can from $11.68 to $14.22, effective July 1, 2001.
The Director of DPW then held another four public hearings (on April 2, 3, 9 and 10, 2001) to review the Staff Report and to permit the Norcal Companies" representatives to cross-examine the City staff and consultants. On April 30, 2001, the Director of DPW issued his Report and Recommended Rate Order on the 2001 Rate Application. The Director"s Report recommended, among other provisions, a 44 percent increase in the residential monthly base rate over a five-year period, including a 28 percent increase the first year, from $11.68 per 32-gallon can to $16.28 per 32-gallon can, effective July 1, 2001. The Director"s Report also recommended that the operating ratio remain at 91.55 percent (corresponding to an 8.45 percent annual profit).8
Objections to the Director"s Report were filed by the mandated deadline of May 15, 2001, with the Chair of the Rate Board by 14 individuals, groups, organizations, businesses and the applicant (Norcal) regarding 54 objections, including objections to (a) the three container system due to lack of space and cost, (b) mini-can rate increases, (c) an absolute monopoly by Norcal, (d) profits of the individual Norcal Companies and failure to review all of the Norcal Companies as a consolidated entity, (e) failure to provide adequate notice of DPW hearings, (f) operating ratio and various other specific issues. The Rate Board then held public hearings to review these objections on May 24, 25, 29 and 30, 2001.
The Rate Board concurred with several of the objections. Accordingly, on May 30, 2001 the Rate Board directed the Director of Public Works to revise the previous Rate Order and to publish the revised Rate Order no later than June 15, 2001, to be effective July 1, 2001. Among other revisions, the Rate Board authorized that the residential monthly refuse rate per 32-gallon can would increase approximately 27 percent in the first rate year beginning on July 1, 2001, going from $11.68 to $14.83 per 32-gallon can, an increase of $3.15 for each can per month. Overall, the Rate Board authorized that by the fifth year, or by June 30, 2006, the base monthly refuse rate per 32-gallon can will be $16.65, which is $4.97 or approximately 43 percent greater than the $11.68 rate in effect prior to July 1, 2001, as a result of additional capital and program enhancements. As had been requested by the Norcal Companies, and recommended by staff and the DPW"s Director, a Cost of Living Adjustment (COLA), extending from 2002 through 2006, would be applied to these residential refuse rates, such that automatic additional rate adjustments will occur over the next five years, without further rate setting procedures being required.
Review of Audited Financial Statements
As part of this study, the Budget Analyst was requested to conduct an expedited review of the audited financial statements for the Sunset Scavenger Company, the Golden Gate Disposal & Recycling Company and the Sanitary Fill Company. The Budget Analyst reviewed the individual audited financial statements for the three subject companies as of September 30, 2000 and September 30, 19999. In addition, the Budget Analyst reviewed the five years of financial data that was reported in both the staff and the DPW Director"s report for the 2001 Rate Application10, which are summarized below:
As shown above, the average derived operating ratio for Sunset Scavenger for the five-year period from 1996, when the last rate increase was approved, through 2000, was 89.14 percent, or an average five-year annual profit margin of 10.86 percent. During this five-year period, the operating ratio for Sunset Scavenger ranged from a high of 92.63 percent in 1996 to 85.46 in 1998, allowing a corresponding profit margin of 7.37 percent in 1996 to 14.54 percent in 1998. According to both the 1996 and the recent 2001 Rate Review Order, the operating ratio for Sunset Scavenger was set at 91.55 percent, or a profit margin of 8.45 percent11. Thus, over the five-year period from 1996 through 2000, Sunset Scavenger actually made an average annual profit of 28.5 percent more than the profit margin established in the operating ratio formula set by the City.
In comparison, the five-year average derived operating ratio for the Sanitary Fill Company was 84.16 percent, resulting in an average annual profit margin of 15.84 percent. As noted previously, Sanitary Fill is also regulated by the City. The set operating ratio for Sanitary Fill is the same as for Sunset Scavenger, at 91.55 percent, or a profit margin of 8.45 percent. Thus, over the same five-year period from 1996 through 2000, 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.
Even more significant, the five-year average derived operating ratio for the Golden Gate Disposal & Recycling Company was 72.76 percent. This results in an average annual profit margin of 27.24 percent. As previously discussed, the City does not review the financial or operating data for Golden Gate Disposal & Recycling Company and does not establish operating ratios for this primarily commercial refuse collection company. Golden Gate Disposal"s operating ratios during this five-year period ranged from 79.28 percent, or an annual profit of 20.72 percent in 1996 to an operating ratio of 68.23 percent, or an annual profit of 31.77 percent in 1998.
A more detailed review of the 1999 and 2000 financial statements for each of the three companies also found that Sunset Scavenger allocated and charged $2,421,076 and $2,388,955 to Golden Gate Disposal & Recycling Company for curbside recycling collections costs for the years ending September 30, 2000 and 1999, respectively. This represented an allocation of 25 percent of each year"s net program costs as directed by the Rate Board and is accounted for as a reduction in Sunset"s expenses. The financial reports indicate that if Sunset had allocated these costs to Golden Gate based on the actual costs of services provided, the allocation would have been approximately $1,377,091 for 2000 and $1,279,078 for 1999, representing approximately 14 percent of the net program costs for 2000 and 1999. Thus, the actual cost for this service for the two years was $2,656,169, but Sunset Scavenger Company actually charged and received $4,810,031 from Golden Gate Disposal, or an additional $2,153,862 more than the actual cost, which was used to offset other Sunset Scavenger expenses. In other words, this financial analysis reveals that Golden Gate Disposal, which serves primarily commercial customers is partially subsidizing the recycling collection costs for Sunset Scavenger, which serves primarily residential customers.
In addition, based on the Rate Application data that was submitted as part of the 2001 Rate Review, the financial data reflects a projected annual revenue transfer from Golden Gate Disposal to Sunset Scavenger over the next five years. The amount of this subsidy from Golden Gate Disposal (commercial customers) to Sunset Scavenger (residential customers) is shown in the Norcal projected data as $5,030,878 in 2002, $5,033,774 in 2003, $2,448,239 in 2004, $2,168,007 in 2005 and $5,290,564 in 2006. Over the projected five-year period, the revenue transfer from Golden Gate to Sunset Scavenger is projected to total $19,971,462. Again, this analysis reflects a continuing projected subsidy from Golden Gate, or the commercial customers to Sunset Scavenger, the residential customers.
Survey of Bay Area Jurisdictions
The Budget Analyst conducted a comparative garbage survey of the residential and commercial refuse collection rates and rate regulation practices in 38 Bay Area jurisdictions, excluding San Francisco. Included in the surveyed jurisdictions are (a) 18 individual cities and towns; (b) the Contra Costa Waste Management Authority, which is made up of five cities and the unincorporated areas in Contra Costa County; (c) the San Mateo Joint Powers Agreement, which is made up of ten cities and the unincorporated areas of San Mateo County; and, (d) the West Valley Joint Powers Agreement, which is made up of four cities (only three cities were included in this survey). A list of the 38 jurisdictions is as follows: the 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. Attachment I to this report contains a chart of all the responses to this survey. Attachment II to this report discusses the individual results of the survey by jurisdiction.
All of the 38 surveyed 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. In contrast, the City of San Francisco does not have a contract with either the Sunset Scavenger Company or the Golden Gate Disposal & Recycling Company to collect residential and commercial refuse in San Francisco. Rather, as noted above, under the provisions of the 1932 Initiative Ordinance, the Department of Public Health is responsible for issuing licenses and permits for refuse collection in the City.
Of the 38 surveyed jurisdictions, 34 jurisdictions or 89 percent collect a franchise fee from the private refuse collector. Three jurisdictions do not collect franchise fees and one jurisdiction did not provide such information. The calculation of the amount of these franchise fees vary considerably, from specific formulas to flat dollar amounts to between 5 and 16 percent of the gross revenues. In addition, the jurisdictions" use of the franchise fees vary from direct recycling and refuse related activities to support for their cities General Fund activities.
Although all of the 38 surveyed jurisdictions have contracts with their private haulers, the process that each community used to select which companies would provide refuse collection varies. For example, the survey found that (a) 18 of the surveyed jurisdictions, or 47 percent, had negotiated their agreements and contract terms with specific private companies, (b) 11 of the surveyed jurisdictions, or 29 percent, have previously used and/or plan to use competitive bidding, (c) 10 of the surveyed jurisdictions, or 26 percent, were either unsure or did not know how their refuse contracts were originally awarded because the agreements had been in place for such an extended period of time, and (d) one jurisdiction (City of San Jose), or three percent, permits non-exclusive contracts with numerous haulers.
This survey also revealed that all 38 Bay Area jurisdictions regulate residential refuse rates. In addition, all 38 jurisdictions, except for two, the Town of Los Altos Hills and the City of San Jose, also regulate commercial refuse rates. It is important to note, however, that the Town of Los Altos Hills is a residential-only community and does not have any commercial businesses and the City of San Jose has a competitive commercial market, with 23 private refuse companies currently operating in the City of San Jose. Therefore, all of the surveyed jurisdictions that have only one provider of refuse services regulate commercial refuse rates. In contrast, as noted above, San Francisco regulates residential, but does not regulate commercial refuse rates, and there is basically only one company, Norcal, that provides all refuse collection services in San Francisco.
Of the 38 jurisdictions that regulate residential refuse rates and the 36 jurisdictions that regulate commercial refuse rates, 25 of these jurisdictions use specified operating ratios (a rate-making formula that provides garbage haulers with the ability to recover their costs plus a fair profit margin) to determine their rates. Eight jurisdictions use competitive bidding or a negotiated contract process. The remaining five jurisdictions were uncertain how their rates were initially established.
Once the rates are initially established, 14 jurisdictions adjust their refuse collection rates using refuse rate reviews, ten jurisdictions automatically adjust their refuse collection rates annually based on various formulas and indices, such as a Cost of Living Adjustment (COLA), Consumer Price Index or the Motor Fuel Index over varying periods of time, seven jurisdictions use a combination of rate reviews and indices, four jurisdictions adjust their refuse collection rates as needed to cover agreement and/or related waste management program costs, two jurisdictions did not provide information on how their refuse collection rates were adjusted and one jurisdiction conducts biannual negotiations with its hauler to adjust its refuse collection rates. As noted above, for residential rates, San Francisco uses an operating ratio formula and under the 2001 Rate Review has now established both annual rate adjustments over the next five years and an automatic annual COLA to be applied to these rates through 2005.
Residential: Of the 38 jurisdictions surveyed, 11 jurisdictions contract with Waste Management, or its subsidiaries, six jurisdictions contract with Norcal, or its subsidiaries, 12 jurisdictions contract with Browning-Ferris Industries (BFI), and 11 jurisdictions have other independent garbage collection companies providing residential garbage collection. San Jose currently contracts with both Waste Management and Green Team for residential garbage collection and San Leandro currently contracts with both Alameda County Industries and Waste Management for residential garbage collection.
Based on our survey results, the average, median and range of residential garbage rates and operating ratios are shown in Table 1 below, with comparisons with San Francisco:
Table 1
As shown in Table 1 above, San Francisco"s current monthly garbage collection rates are quite comparable to the 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).
A review of the survey results indicates that the residential garbage rates tend to be higher in less densely populated areas and lower in more densely populated areas, since the costs of operation are increased as the garbage trucks are required to travel further distances for each pick-up. For example, with comparison of services provided by the same hauler, (a) the garbage rates for one 32-gallon can in Orinda ($17.70) and the unincorporated areas ($14.49) of the Contra Costa County Waste Management Authority are higher than the garbage rates in Walnut Creek ($11.79); and similarly (b) the garbage rates for one 32-gallon can in Atherton ($23.13) and Hillsborough ($21.71) are higher than the rates in San Mateo ($10.88), Burlingame ($11.48) and Menlo Park ($11.51).
As shown in Table 1 above, the minimum operating ratio for the 25 jurisdictions that use operating ratios is 96 percent, which yields a profit margin of four percent. The maximum residential operating ratio is 85 percent, which yields a profit margin of 15 percent. The average operating ratio for the 25 jurisdictions that use operating ratios is 89.68 percent or an average profit margin of 10.32 percent. It should be noted that for the 25 surveyed jurisdictions that use operating ratios to determine rates, the operating ratios used were the same for both residential and commercial refuse collection.
In comparison, San Francisco"s (Sunset Scavenger and Sanitary Fill) residential operating ratio that is established for rate setting purposes is 91.55 percent, which permits a profit margin of 8.45 percent. Based on these survey results, San Francisco"s operating ratio is well within the range of between 85.0 percent and 96.0 percent of these 25 other cities. However, San Francisco"s established operating ratio of 91.55 percent is slightly higher (2.09 percent higher12 than the average operating ratio of 89.68 percent and 0.60 percent higher than the median operating ratio of 91.0 percent) than these other cities residential and commercial operating ratios. An alternative comparison indicates that San Francisco"s established operating ratios permit a slightly lower profit margin than the average established profit margins in these other jurisdictions.
However, as discussed in the Review of Audited Financial Statements Section above, 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 these other jurisdictions. In other words, Sunset Scavenger actually realized a 5.23 percent greater profit than the profit margins established in these other 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 these other jurisdictions. In other words, Sanitary Fill actually achieved a 53.5 percent greater profit than the profit margins established in these other jurisdictions. It should be noted that the survey obtained municipal established operating ratio data and did not obtain data on the actual operating ratios or profit margins realized by the individual refuse companies in these other jurisdictions.
Commercial: Of the 38 jurisdictions surveyed, nine jurisdictions contract with Waste Management, or its subsidiaries, six jurisdictions contract with Norcal, or its subsidiaries, 12 jurisdictions contract with BFI and nine jurisdictions contract with other garbage collection companies for commercial garbage collection. San Jose currently has 23 franchise agreements for commercial garbage collection in San Jose; however, 90 percent of the commercial customers use BFI and Waste Management. San Leandro currently has two contracts, by district, with both Alameda County Industries and Waste Management for commercial garbage collection. As noted above, the Town of Los Altos Hills does not have any commercial businesses and, therefore, does not have any commercial garbage contractor.
Based on our survey results, the average, median and range of commercial garbage rates and operating ratios are shown in Table 2 below, including comparisons with San Francisco:
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 Golden Gate Disposal, the primary commercial garbage hauler.
As shown in Table 2 above, San Francisco"s published monthly commercial garbage collection rates13 are within the range of the rates reported in the other surveyed jurisdictions. However, as shown above, San Francisco"s commercial rates are significantly higher than the average or the median of the other jurisdictions; in fact, San Francisco"s rate of $114.86 per month is 45.90 percent higher than the average for one cubic yard of waste with once a week pick up and the rate of $285.31 is 37.63 percent higher than the average for three cubic yards of waste for once a week pick up. It should be noted that in most cases, it is the commercial building owners that actually pay the commercial refuse fees to Sunset Scavenger and Golden Gate Disposal, and then such commercial refuse fees are passed on to the tenants in the commercial building as part of the overall rent and operating costs; as a result, it is likely that most commercial tenants do not know how much they are actually paying for commercial refuse collection.
Although San Francisco"s commercial rates are significantly higher than the average or the median of all the other surveyed jurisdictions, it should be noted that only four of the 37 reported jurisdictions (excludes Los Altos Hills) surveyed actually had higher rates than San Francisco, the City of Napa ($496.37 for three cubic yards of waste), the City of East Palo Alto ($143.54 for one cubic yard and $303.27 for three cubic yards of waste), the City of Orinda ($291.36 for three cubic yards of waste) and the unincorporated areas of Contra Costa County ($298.26 for three cubic yards of waste). The City of Napa is currently preparing to conduct a Request for Proposal (RFP) process in 2003 to competitively bid commercial and residential refuse collection, due to Napa"s recognition of their significantly high rates and because their existing contract has not been rebid for 75 years. The City of East Palo Alto reported much higher rates than other adjacent communities who have the same refuse collector because the City of East Palo Alto has independently imposed (a) a recycling surcharge of 13 percent on their commercial rates14, and (b) a requirement on the refuse collector to pick up all trash whether it is inside or outside the trash bins. As discussed above, less densely populated areas, such as Orinda and the unincorporated areas of Contra Costa County also tend to have higher rates than more densely populated areas, since the costs of collection are higher as the garbage trucks are required to travel further distances for each pick-up.
As also shown in Table 2 above, the commercial operating ratios for the 25 jurisdictions that use operating ratios were the same as the residential operating ratios shown in the Section above, since all of these cities jointly regulate residential and commercial garbage rates. As discussed in the above Section of this report, based on the actual financial records for the five-year period from 1996 through 2000, Golden Gate Disposal"s commercial derived operating ratio was 72.76 percent, resulting in an average five-year annual profit margin of 27.24 percent for Golden Gate Disposal. Based on our survey results, the average operating ratio in the 25 Bay Area 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 89.68 percent reported by the 25 surveyed 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 reported by the 25 Bay Area jurisdictions that use operating ratio data.
Policy Analysis and Recommendations
Based on this review of the 1932 Initiative Ordinance, the City"s existing Waste Disposal Agreement, a review of the 2001 Rate Application process, a survey of 38 other Bay Area jurisdictions, a review of audited financial statements and related financial reports, interviews with members of the Rate Board and interested staff, the Budget Analyst has identified the following six policy issues and made the following recommendations. It should be noted that some of these recommendations would require changing the 1932 Initiative Ordinance, which is subject to voter approval.
1. Existing Refuse "Monopoly" - When the 1932 Initiative Ordinance was approved, several independent refuse companies operated in San Francisco. However, as a direct result of acquisitions during the 1980s, both Sunset Scavenger Company and Golden Gate Disposal & Recycling Company, which were the two refuse collection companies licensed and permitted to operate in the City, became subsidiaries of the Norcal Waste System, Inc. Company15. Except in very limited situations, such as on Federal properties in the City, other refuse companies have not sought or been granted permits or licenses to collect residential or commercial refuse in the City. As a practical matter, since the City"s Health Code requires refuse collection for all residences and businesses and these two Norcal Companies are the only permitted collectors in the City, all residences and businesses are therefore required to have one of these Norcal Companies collect their refuse. As a result, a private monopoly is essentially in effect for both residential and commercial refuse collection services in San Francisco.
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 refuse companies to operate and collect refuse on specific routes in San Francisco, other than these two Norcal Companies. However, until the existing Waste Disposal Agreement expires, estimated to occur in the next 9 to 12 years, and other options for transporting and disposing of San Francisco"s waste are available, it is uncertain whether it is financial viable or efficient for other companies to collect refuse in San Francisco. To foster a more competitive environment, the Department of Public Health should more openly encourage other refuse companies to seek licenses and permits to operate in San Francisco. However, it should be noted that there may be various impacts from such competition, such as increased truck traffic and air pollution emissions. The specific potential impacts would need to be analyzed prior to issuing additional permits or licenses. However, such permits and licenses could be restricted to provide specific enhanced services, to minimize any negative impacts and at the same time realize enhanced residential, commercial and recycling services.
2. Transfer Station and Disposal Agreement - The City"s existing Waste Disposal Agreement with Norcal designates the Sanitary Fill Company as the sole entity that can receive and dispose of all San Francisco solid waste, specifying that all such refuse shall be delivered to the Norcal-owned transfer station, currently located across U.S. Highway 101 from Candlestick Park and then subsequently transferred to the sole disposal site at the Altamont landfill in Alameda County, which is owned by Waste Management, Inc. 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. In addition, during both the 1996 and the 2001 Rate Review Process, Norcal requested that the ratepayers fund their further investment in their own facilities with major capital improvements to construct and operate Materials Recovery Facilities (MRF) at both the existing transfer location and at Pier 96. Norcal currently leases a building at Pier 96 from the Port, at which Norcal conducts operations.
The mandated use of the transfer station, which is owned by Norcal, limits the City"s existing flexibility and potential future options for any changes. As noted above, the existing Waste Disposal Agreement which requires the use of these facilities will expire in the next 9 to 12 years, depending on the rates of disposal. The City should immediately begin to explore future mechanisms for assuming the control of the transfer station by purchasing the land, facilities or raising fees to potentially purchase such capital investments. In this way, the City, rather than a privately-owned refuse company, would own and control the transfer station. The Board of Supervisors could begin this process by funding the costs and directing that various City departments (i.e., the City Attorney, the Department of Public Works, the Real Estate Division) research and study the potential financial and legal mechanisms to acquire the transfer station for the City. Such a study should include both the potential positive and negative impacts of such ownership. Such exploration should also include alternative arrangements for the operation and management of the transfer facility and should be conducted in conjunction with the search for a new waste disposal site for San Francisco.
3. Regulation Limited to Residential Rates - In accordance with the 1932 Initiative Ordinance, only the residential collection rates are subject to the rate review process. As discussed above, 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. The 1932 Ordinance also specifically states that non-residential refuse collection services are subject to separate agreements between the commercial producer of the refuse and the City permitted and licensed refuse company. Therefore, the City currently has no authority to regulate commercial refuse rates.
However, even though the commercial rates are not included in the rate review process and thus 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 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. In reality, both Sunset Scavenger and Golden Gate Disposal are owned and controlled by one parent company, Norcal, although the rate review process is limited to only examining Sunset Scavenger Company as the model for residential rate setting purposes.
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.
Therefore, 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, as well as for Sanitary Fill and any other Norcal Companies related to the San Francisco operations. 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 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. By combining the San Francisco-based Norcal Companies into a single operating entity for purposes of the rate review process, and then establishing one overall operating ratio that is consistent with the operating ratios established by other Bay Area jurisdictions, it is likely that commercial rates in San Francisco would be reduced. As noted above, such a change in the operating ratios would likely result in a loss of profit for Golden Gate Disposal. It should be noted that depending on how such rates are determined, residential rates could increase by an unknown amount. Alternatively, specific policies (i.e., differing operating ratios, commercial rate subsidies of residential rates) could be established to ensure that residential rates do not increase significantly.
4. Alternative Mechanisms - 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, with such fees ranging up to 16 percent of the refuse company"s gross revenues.. 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. Rather, in accordance with the 1932 Initiative Ordinance, 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. In San Francisco, all of the costs of the Solid Waste Management Program, Altamont disposal fees, Waste Management Authority fees, license fees and the rate review process are paid by Norcal through a separately established "Impound Account". In 2002, the Impound Account is projected to receive an estimated $9.7 million from Norcal. 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 also 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 of annual cost is paid from General Fund revenues.
In addition, 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 in San Francisco. 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.
However, as noted above, until the expiration of the existing Waste Disposal Agreement, there may be an economic advantage for Norcal to compete in San Francisco. It is unclear what the impact would be on residential and commercial rates as the result of competitive bidding, negotiated agreements or open competition. As noted above, San Francisco"s basic residential rates are currently 5.13 percent below the average rates of other Bay Area jurisdictions and commercial rates are 45.9 percent higher than the average rates of other Bay Area jurisdictions.
5. Public Notice Provisions - The 1932 Initiative Ordinance requires that 20 days prior to the date of the public hearing that a public notice be published at least once in the official newspaper announcing the time and place of the public hearing. In addition, the 1932 Ordinance states that any person, firm or corporation that desires notice of further proceedings or action may file a written request with the Chair of the Rate Board, in order to receive the Director of Public Works Report and Recommended Order. The Brown Act and the City"s Sunshine laws also apply to certain aspects of the rate review process.
During the 2001 rate review process, notice of the initial public hearings to be held on February 26, 2001 and March 1, 2001 was advertised in the San Francisco Independent on February 3, 2001. In addition, DPW followed the notice requirements for the four other DPW public hearings that were held in April of 2001 and public notices and the agenda were published for the Rate Board hearings. Notices were also posted at the San Francisco Library and on the DPW website. Separate notices were also sent by mail to 120 neighborhood and other groups and to 40 interested individuals, that had previously notified the City. Thus, DPW more than complied with the public notice requirements of the sunshine laws and the 1932 Ordinance for the DPW public hearings and the Rate Board hearings.
Nonetheless, one of the issues appealed to the Rate Board was the lack of public notification of the Rate Hearings. Although the City complied with the public notice requirements, 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 refuse rate changes. Such notice should include a brief description of the application procedures, the dates, times and locations of the public hearings and a potential contact person, including an address and telephone number to obtain additional information. Such notification could be included as part of the company"s regular billing notices. Providing better public notice to all affected ratepayers should also result in greater public input into the rate setting process.
6. Highly Technical Data and Proceedings - 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. Furthermore, in compliance with the 1932 Ordinance, the DPW Director"s public hearings are more similar to a court proceeding where staff and consultants on both the applicant"s and the City"s sides present data and evidence of findings and analysis and are then cross-examined by opposing counsel. Norcal used three attorneys during the 2001 Rate Review process. This process can be extremely intimidating and difficult for the public and therefore inhibit the public"s participation.
The highly technical and complex procedures used for the DPW Director public hearings are coupled with the fact that, in accordance with the 1932 Ordinance, after the DPW Director"s hearings are completed, no new evidence may be presented at the Rate Board hearings that was not already presented before the Director of DPW. Instead, the Rate Board acts as an appellate body and can only hear and discuss those issues that are the subject of formal appeal objections. Such objections must also solely rely on the evidence and facts already presented before the Director of DPW. Based on interviews with members of the Rate Board, one of their primary concerns was the inability of the public to adequately participate in the rate review proceedings due to its highly technical nature, and the Rate Board"s inability to address the public"s frustration with how to make their concerns regarding the rates to be taken into consideration if their objections are not based on the evidence and facts already presented before the Director of DPW.
One remedy would be for the City"s Rate Board to retain a temporary City ratepayer-funded position, for the duration of the Rate Review process that would act on behalf of the ratepayers. The person hired for this position should be a public interest attorney or refuse expert that is familiar with rate regulations and/or utility rate setting procedures and is able to work well with the public. The responsibilities of this position would be to advocate the public"s positions and to represent the public"s views in an articulate and comprehensive manner at the DPW Director"s hearings and before the Rate Board. The costs to fund this position could be paid through the Impound Account, as are all of the current costs of the Rate Review process.
1 Once the rates are set by the Rate Board, the Rate Board does not later reexamine the operating revenues and costs achieved by the regulated Companies and reset the rates until a subsequent rate application is submitted. Therefore, once the rates are set, the Companies may actually achieve a higher or lower operating ratio than the amount projected, and therefore may achieve a corresponding higher or lower profit margin.
2 In San Francisco, the Norcal Waste System, Inc. Companies include Sunset Scavenger Company, Golden Gate Disposal & Recycling Company and Sanitary Fill Company. Sanitary Fill Company is owned equally by Golden Gate Disposal & Recycling Company and 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). Norcal also formed another wholly owned unregulated subsidiary, called Recycle Central, Inc. in May of 1997 to operate a Materials Recovery Facility (MRF) at Pier 96. Recycle Central, Inc. had no employees or business operations at the time of the 2001 Rate hearings. The Director"s Report, however, said that Norcal should use Sanitary Fill, Inc., an existing regulated Norcal Company, to operate Pier 96.
3 This Initiative Ordinance was amended in 1946, 1954 and 1960. In more recent years, initiative petitions were submitted for the November of 1993 election (Proposition Z) and the November of 1994 election (Proposition K) to repeal and significantly change the 1932 Initiative Ordinance, but were not approved by the voters of San Francisco.
4 According to the Department of Public Health, other than the Norcal Companies, the only collection permits that have been granted to other refuse companies are on Federal properties located in the City, such as Waste Resources Technology for a permit to collect from the Federal Veterans Administration Hospital and Bay Cities Refuse Services for a permit to collect on Treasure Island.
5 The operating ratio is derived by subtracting the Operating Income for Rate Purposes (B) from the Total Revenues (A) for the Company for each year, and then dividing that sum, which is the Derived Operating Expenses (C) by the Total Revenue (A) amount, or A-B=C/A. The actual figures used to determine the operating ratio are based on Norcal"s audited financial statements and projections of future costs and revenues. It should be noted that there are numerous adjustments for portions of various Norcal costs that are not included in the rates, such as rental income, amortization, depreciation and ESOP expenses.
6 Sunset Scavenger, which collects refuse in most portions of the City, conducts primarily residential refuse collection services. Golden Gate Disposal, which collects refuse in the northeastern portion of the City, including downtown, provides primarily commercial refuse collection services. For rate setting purposes, the City only reviews Sunset Scavenger"s costs, revenues and operations, for establishing the residential refuse rates.
7 Rates for disposal are subject to the same rate review process described above with respect to residential collection rates.
8 Although the basic allowable operating ratio remained at the same 91.55 percent level, the 2001 Rate Review process established a diversion incentive account (DIA) mechanism which encourages the Norcal Companies to divert specified quantities of waste to assist the City in meeting the State"s mandated requirements for waste diversion from the landfill. If Norcal achieves such diversion, the allowable operating ratio can be lowered to 90 percent, which increases Norcal"s allowable profit to 10 percent.
9 Sunset Scavenger Company, Golden Gate Disposal & Recycling Company and Sanitary Fill Company Financial Statements with Supplementary Information prepared by KPMG (Norcal"s auditors) for September 30, 1999 and 2000.
10 This information was prepared by the City"s consultants and reviewed by City staff, consultants and Norcal during the 2001 Rate Review process.
11 As noted above, once the residential rates are set by the City, the City does not later reexamine the operating revenues and costs achieved by the regulated Companies and reset the rates until a subsequent application is submitted. Therefore, once the rates are set, the Companies may actually achieve a higher or lower operating ratio than the amount projected, and therefore a corresponding higher or lower profit margin.
12 Based on the formula of San Francisco"s operating ratio (91.55 percent) less the survey cities average operating ratio (89.68 percent), divided by the average cities operating ratio (89.68 percent).
13 Based on the commercial rates effective July 1, 2001, revision date of October 1, 2001, as submitted by Norcal to the Department of Public Health.
14 If the 13 percent surcharge were removed, the standard front-loader commercial monthly garbage rates would be $124.88 for one cubic yard of waste with one pick-up per week and $263.84 for three cubic yards of waste with one pick-up per week.
15 As noted above, Sanitary Fill Company is owned equally by Golden Gate Disposal & Recycling Company and Sunset Scavenger Company, which are both wholly owned subsidiaries of Norcal Waste Systems, Inc.