Contracting out: Adapting local integrated waste management to regional private landfill ownership

The trend toward regional privately owned MSW landfills in the US is raising concerns over the ability of market competition to control pricing and the economic viability of integrated waste management systems. How can these concerns be addressed? by Jeremy K. O’Brien Municipal solid waste (MSW) that is not incinerated or diverted through recycling or composting programmes is disposed of in the US in landfills. In 1991 the US Environmental Protection Agency (US EPA) approved federal regulations (Subtitle D of the Resource Conservation and Recovery Act) governing the technical criteria for MSW landfills. The aim of these regulations was to provide greater protection to human health and the environment, but they also made it more expensive to build and more complex to operate MSW landfills. The result was a trend towards larger, regional landfills in the US in order to achieve ‘economies of scale’ savings to compensate for higher capital and operating costs. The number of landfills US fell from 7924 in 1988 to 1654 in 2004 (Figure 1) - a reduction of almost 80%. According to the US EPA, disposal capacity in the US has remained relatively constant despite this decrease, indicating the trend toward larger regional landfills. FIGURE 1. Number of operating MSW landfills in the US (1988-2002 data from US EPA1; 2003 figure interpolated; 2004 figure from BioCycle2) Click here to enlarge image null The trend towards regional privately owned MSW landfills The trend toward regionalization of MSW landfills has been accompanied by a growth in the number of regional privately owned disposal facilities. The percentage of facilities owned by the public sector fell from 83% in 1984 to 73% in 1997 and 64% in 1998.3 The private sector owned 67% of total landfill capacity in 1998 while public organizations owned 33%.4 The ‘big three’ in the US waste management industry (Waste Management, Inc., Allied Waste Services Inc. and Republic Services Inc.) controlled at least 65% of disposal volumes in the US in 2003.5 These three companies currently control about 70% of the permitted MSW disposal capacity in the US.6 Table 1 shows the breakdown between public and private sector-owned MSW landfills in the US in 2004. Although an estimated 64% were publicly owned in 2004, these landfills account for only 17% of permitted MSW landfill capacity for that year while the 595 privately owned MSW landfills account for 83%. TABLE 1. Public and private ownership of MSW landfill capacity in the US, 2004 Parameter Public Private Total Ownership of MSW landfills Number of facilities2 1059 595 1654 % of facilities3 64 36 100 Permitted MSW landfill capacity6 Permitted MSW landfill capacity (million tons) 1441 7254 8695 % of permitted MSW landfill capacity 17 83 100 Annual MSW disposal MSW disposed in 2004 (million tons)2 56.3 192.3 248.6 % of MSW disposed in 20045 23 77 100 Average daily disposal rate (272 days/year) 195 1188 The public landfills, which accept about 23% of the MSW disposed in the US, dispose of less than 200 tons/day on average. The remaining 77% of landfilled MSW goes to private sector landfills, which average about 1200 tons/day. The tremendous difference in daily disposal capacity between the two sectors means that the large privately owned landfills have a significant competitive advantage due to economies of scale. Reasons for regionalization of MSW landfills The Outer Loop disposal facility at Louisville, Kentucky, is a regional privately owned landfill Click here to enlarge image In many states, as well as at the federal level, the development of regional MSW landfills has been and is encouraged. According to the State of California, ‘US EPA has stated the intent of Subtitle D is to promote regionalization by closing small facilities which cannot afford to comply with location, design, operating, closure and post-closure requirements of the federal regulations.’ The two main reasons for the continued trend toward MSW landfill regionalization are: the economies of scale associated with larger facilities the inability of municipalities to direct the flow of wastes generated within their jurisdictions to designated disposal facilities. Economies of scale It has long been recognized that there are significant economies of scale associated with the larger MSW landfills. Since the promulgation of Subtitle D in 1991, numerous mathematical curves illustrating the relationship between the daily disposal capacity of a landfill and its corresponding disposal cost have been published. Figure 2 shows an economy of scale curve depicting the results of five recent public and private sector bids to develop a major landfill in south-eastern US. Based on these bids, a MSW landfill disposing of 200 tons/day would incur costs of about $38/ton while a larger regional public landfill disposing of 1200 tons/day would incur costs of about $21/ton, i.e. about 55% lower unit costs. FIGURE 2. MSW landfills: economies of scalePer-ton costs based on average present value costs for waste disposal over a 25-year period. Bid costs were adjusted to account for landfill pre-development costs ($3.09/ton), site development costs ($1.33/ton), post-closure costs ($0.97/ton), and indirect/overhead costs ($0.37/ton). The added costs were based on costs incurred for an operating 800 tons/day landfill located in south-eastern US Click here to enlarge image null Loss of waste flow control As the result of a ruling in the US Supreme Court in the ‘Carbone’ decision, local governments lost the right in 1994 to utilize regulations to direct the flow of waste generated within their jurisdictional boundaries to designated disposal facilities. The Carbone decision had a significant impact on their ability to implement cost-effective integrated solid waste management systems including recycling, composting, energy recovery and/or household hazardous waste management programmes. Integrated systems, which have historically been implemented in response to national and state recycling and waste management goals, are often more expensive than those that involve primarily only landfill disposal. As a result, integrated solid waste systems cannot compete with landfill on a purely economic basis. Because of the Carbone decision, solid waste hauling companies have the right to dispose of their wastes in cheaper, regional landfills even if the waste is generated in a County that has implemented an integrated waste management system. Some communities have been able to achieve flow control through the use of contracts and/or franchise agreements. Can market competition control landfill pricing? Perhaps the most significant cause of concern for local governments considering relying on regional privately owned landfills for solid waste disposal is the reduction in competition and the resulting impact on the pricing of disposal services. Do the nature and conditions of the regional solid waste disposal market result in sufficient competition to prevent significant increases in prices? According to the Reason Public Policy Institute (RPPI),’on a local level, there can be problems with market power by one firm.’3 One factor that appears to inhibit local or regional competition is the increasing market dominance by the ‘big three’ (see above fig.2). The stated strategy of these companies is to ‘vertically integrate’ in the markets they serve. For example, Republic Services pointed out in its 2005 Annual Report that: ‘By being able to control the waste stream in a market through the collection, transfer and disposal process, integrated solid waste companies gain a further competitive advantage over non-integrated competitors’. This suggests that the major companies in the US waste management industry are aiming to develop regional market niches in which they are the major or dominant player with respect to both collection and disposal services. A study of this issue, carried out for the State of Maine in 2002, concluded that: ‘The change in Maine’s solid waste industry mirror virtually identical national changes. This consolidation in the solid waste industry has raised concerns in Maine, in other states and at the national level that competition in various aspects of solid waste management may be diminished’.7 The geographic hauling advantage Another factor that inhibits competition is referred to in the industry as the ‘geographic hauling advantage’. This term refers to the natural competitive advantage that a regional landfill (public or privately owned) has over a distant landfill due to the costs associated with waste hauling. Industry analysts have advised private sector waste companies to set market prices to reflect this advantage. The King County Cedar Hills Landfill in Washington state is a local publicly owned landfill that will close within 10 years. Local landfills require shorter waste haulage than distant regional landfills Click here to enlarge image The geographic hauling advantage (GHA) works against the potential price reductions that could be realized due to the economies of scale possible at large regional landfills. An example of the impact of the GHA is presented in Table 2. In this example, a local community has the option of either constructing a local MSW landfill or hauling its waste to a regional landfill. There are two regional landfills; Regional Landfill A is 20 miles (30 km) away and Regional Landfill B 70 miles (110 km) further away. TABLE 2. Examples illustrating the effect on costs of the geographic hauling advantage Parameter Local landfill Regional landfill A Regional landfill Distance (miles) - 20 70 Size (tons/day) 200 1200 1200 Waste transfer cost ($/ton) - 5 5 Waste hauling costa ($/ton) - 4 14 Waste disposal costb ($/ton) 38 21 21 Total cost 38 30 40 Price($/ton) 38 38 or 40 40 a Waste hauling costs are estimated based on a hauling cost of $2 per vehicle mile and a payload of 20 tons.b Waste disposal costs are based on Figure 2 The closer regional landfill has a GHA of $10.00/ton. This means that the owner of Regional Landfill A could charge up to $10/ton more than the estimated disposal cost associated with a 1200 tons/day. In effect, the GHA could erase the potential price reductions that could be realized due to economies of scale if the competing landfills were located in close proximity. Table 3 also indicates that the owner of Regional Landfill A could set its disposal prices at up to $8.00 above costs and still be competitive with a local landfill developed by the community requiring the disposal service. Guidelines for the utilization of remote regional privately owned landfills The following advice is aimed at communities considering contracting out MSW disposal services at regional privately owned landfills. Own the local transfer stations The trend toward MSW landfill regionalization has been accompanied by a tremendous growth in the number of transfer station in the US. In 2004 there were 3744 transfer stations in the US.2 According to a 2002 US EPA report on transfer stations: ‘The nationwide trend in solid waste disposal has been toward construction of larger, more remote, regional landfills. Economic considerations, heavily influenced by regulatory and social forces, are compelling factors leading to this result … Waste transfer stations play an important role in a community’s total waste management system, serving as the link between the community’s solid waste program and a final waste disposal facility.’8 The primary purpose of a transfer station is to reduce the cost of transporting waste to disposal facilities. This is accomplished by consolidating small (e.g. 15-30 m3) waste loads from waste collection vehicles into larger transfer vehicles (e.g. 90 m3+) for long haul transport. This enables collection crews to spend less time travelling to and from distant disposal facilities and more time out on the routes collecting wastes. In addition to reducing transportation costs, transfer stations provide an opportunity for waste to be screened or diverted for recycling. Waste reduction and recycling avoid the costs of hauling and disposal at a remote, regional landfill. Transfer stations also provide the community with flexibility in the selection of remote regional MSW landfills for waste disposal. For both these reasons, it is important that the transfer station(s) used by the local community are owned by the community. Communities that make use of privately owned transfer stations are generally restricted to utilizing the landfill owned by the company that owns the transfer station. Communities are thus prevented from taking advantage of any price reductions or disposal alternatives that may become available through market competition. In addition, the owner of a private sector transfer station has no incentive to promote waste diversion and/or recycling at the transfer station on behalf of the community. Indeed the landfill owner would lose money if this occurred. Design the transfer stations for recycling As well as needing to own the transfer station, it is important for the community to specify its functions to include waste diversion and recycling. Each ton of waste diverted for recycling or reuse at the transfer station will result in a direct cost saving to the community due to the avoidance of waste hauling and disposal costs. Transfer station designers are beginning to address this need by co-locating material recovery facilities (MRFs) and other processing facilities (e.g. wood grinding and garden/yard waste shredding operations) at transfer stations. They are also including features such as large tipping floors to allow screening for recyclables before the load is pushed in the transfer trailer, together with conveyors, storage silos and loading bays for the recovered materials. Develop effective contracts for MSW disposal services When utilizing a remote, regional, privately owned landfill for disposal, a community no longer has direct control over the disposal facility and must adjust to contracting out for disposal services. The negotiation of a comprehensive and effective contract becomes paramount. The Alliance Landfill is a regional privately owned landfill in Pennsylvania. It recently received an ISO 140001 certification and received a SWANA 2006 Excellence Award, winning the Gold Level for the Landfill Management Division Click here to enlarge image A first step toward the negotiation of an effective contract is the delineation of services currently provided at the local landfill. Municipal solid waste directors should ask managers and operators at the landfill to list these services. This list can then be used to guide the negotiation of a ‘scope of services’ for inclusion in the contract with the private sector disposal provider. Important items to be agreed include: the length of the contract days and opening hours for receiving waste at the remote landfill types of waste that will be accepted types of transfer vehicles that can be accommodated. Important contract provisions that have been negotiated by SWANA members include: No minimum tonnages are required to be delivered to the remote disposal facility by the community (i.e. no ‘put or pay’ contract provisions). The hours and days of operation by the transfer station or receiving facility are specified by the community. Maximum cycle times at the disposal facility are guaranteed by the contractor. The contractor must provide back-up transfer and disposal facilities. The price escalation rate is based on a recognized index such as the Consumer Price Index (CPI). A common problem is that communities often fail to distinguish between portions of the tipping fee that are fixed and those that are variable. This becomes important in terms of any escalation of disposal prices charged at the remote, regional landfill. Table 3 shows some typical cost elements at a MSW landfill. TABLE 3. Typical cost elements at a MSW landfill Cost element Type Pre-development Fixed Site development Fixed Cell construction Fixed for life of cell (typically 3-5 years) Cell closure Fixed for life of cell (typically 3-5 years) Landfill operation Variable Equipment Fixed for 7-10 year intervals Indirect/overhead Variable A number of these cost elements are either fixed over the life of the landfill site or the landfill cell. Communities should be aware of the portion of the tipping fee that is: fixed periodically variable variable on an annual basis. They should specify a separate cost escalation methodology and cost escalator for each portion of the fee. In light of recent increases in fuel price increases, a separate escalator should be established for fuel costs. Municipal solid waste managers will find it helpful to refer to any contracts for the implementation and operation of waste-to-energy (WTE) facilities to combust MSW. Two contracts are generally issued in the public procurement of these facilities - one for facility construction and another for facility operation. Different price guarantees and cost escalators are negotiated for the capital (i.e. fixed) and operating portions of such facilities. Form public-private or public-public partnerships to develop regional landfill capacity Existing privately owned regional MSW landfills in the US have been developed as ‘merchant’ facilities. Such facilities are not constructed to serve any particular community but rather are designed to serve a particular regional market. Again using the WTE industry as a model, a local community could join with other communities to jointly contract with a private company to site, permit, design, construct and operate a remote landfill on their behalf. Unlike privately owned merchant facilities, the use of such a landfill could be restricted to the public partners involved in the partnership. This approach allows local communities to take advantage of the economies of scale associated with large regional landfills, but enables the public partners to control the tipping fees charged at the facility through the partnership contract. Alternatively, local communities could partner with one another to develop a regional publicly owned landfill. A good example of this approach is the Three Rivers Solid Waste Authority, which owns and operates a regional public landfill that serves a nine-county region in western South Carolina. Public-public and public-private partnerships both suffer from the drawbacks of: having to pay the up-front costs for landfill siting and permitting incurring the political liability associated with siting a new regional landfill. If drawn up properly and managed efficiently, however, such landfills can form part of a cost-effective integrated waste management system. Jeremy K. O’Brien, PE is Director of Applied Research at the Solid Waste Association of North America (SWANA)e-mail: jobrien@swana.org SWANA has been a leading professional association in the solid waste field for over 40 years. Its Applied Research Foundation (ARF) supports SWANA by providing funding for studies on important solid waste concerns. The trend toward landfill privatization in US was noted by the disposal group within ARF as an issue of high importance. This article is based on work conducted within this group. Notes 1. US Environmental Protection Agency. Municipal Solid Waste Generation, Recycling and Disposal in the United States: Facts and Figures for 2003. April 2005. www.epa.gov/msw/pubs/msw05rpt.pdf 2. Simmons, P., Goldstein, N., Kaufman, S.M., Themelis, N.J and Thompson, J. ‘The State of Garbage in America’, BioCycle, 47(4), p. 26 (April 2006). www.jgpress.com/archive.html 3. Segal, G. and Moore, A. Privatizing Landfills: Market Solutions for Solid-waste Disposal. Policy Study No. 267. Reason Public Policy Institute, May 2000. 4. Burgiel, J. Trends in Privatization and Managed Competition: National Survey Results. R.W. Beck, 1998. 5. Fisher, W. and Horne, B. >Landfill Pricing: a Key To Long-Term Value Creation. Equity Research, Raymond James and Associates, Inc., July 2004. 6. Report made by M. Hoffman to SWANA’s Executive Directors Meeting, Alburquerque, NM, February 2006. 7. Townsend, R. and Ackerman, F. An Analysis of Competition in Collection and Disposal of Solid Waste in Maine. Maine Attorney General’s Office, December 2002. 8. US Environmental Protection Agency. Waste Transfer Stations: a Manual for Decision-Making. June 2002. www.epa.gov/epaoswer/non-hw/transfer.htm To comment on this article or to see related features from our archive, go to www.waste-management-world.com and click the ‘Forum’ tab.