Balancing Costs And Revenues For Strong Unit Pricing Programs

Michael Shapiro

Variable rate pricing (or unit pricing) offers an incentive for waste reduction, which tends to increase participation in recycling and composting programs, all of which minimizes waste collection costs.

Under unit pricing, residents pay for the actual amount of trash generated, rather than through taxes or flat fees. The task, however, is to en-gineer a program that the community will support by identifying the services desired and establishing rates that consistently cover these costs.

How do you set a balanced rate structure? Local solid waste officials, haulers and facility owners must work together from the outset to find a winning formula. In addition to designing a rate structure, these planners must set unit pricing goals, educate the community and implement the program.

Communities that have successfully adopted unit pricing selected options and prices that reflected their unique local priorities. This flexibility may be useful after program implementation as well. For example, if residents threw away less waste than anticipated, this would yield smaller revenues; consequently, if the rates prove to be unevenly balanced, adjustments could be made such as raising prices slightly.

Designing a balanced rate structure begins with analyzing the ways to organize a unit pricing program. After determining whether the program should measure collected waste by weight or volume, planners need to consider the types and sizes of containers to use and the most appropriate service options. Deci-sions in one area will influence, or even determine, responses to the re-maining choices.

Pounds Or Gallons? Under unit pricing, residents are charged either by the weight or volume disposed. The two systems have very different design and equipment requirements.

In volume-based systems, residents are charged for each container they generate using a specific size can or bag (or several can or bag sizes). Some programs require residents to purchase special trash bags or tags or stickers for their containers; the price typically includes the waste collection services. Volume-based programs encourage residents to compact the waste to fit into their containers.

Under weight-based systems, collection crews weigh the waste each household sets out at the curb. The municipality or hauler then bills each household per pound produced. Weight-based systems provide a more direct link between waste reduction and savings, since every pound of waste prevented, recycled or composted yields savings. These systems tend to be more expensive to implement and operate since they require special equipment and more labor to manage the billing system.

As a result, although more than 1,000 communities now have some form of unit pricing in place, few have implemented weight-based systems.

While volume-based programs provide most of the information on pricing structures, many of the cost-and-revenues issues apply to both systems.

Bag It, Can It, Tag It When developing volume-based rates, decide on a suitable container upon which to base billing. One option is to distribute single, large cans. Households are then charged according to the number of cans they use.

A set of variable-sized cans also can be distributed to offer a greater waste reduction incentive. For example, where residents find it difficult to reduce set-outs from two 90-gallon cans to one, using 60-gallon containers might work.

A system also can be based on colored or distinctively marked standard-sized trash bags, typically in 20- to 30-gallon sizes. Residents are charged based on the number of bags they use. Often, this fee is as-sessed by selling the required bags via retail outlets, municipal offices or other local sites. Strong bags (two mils or thicker) are preferred, since residents will tend to tightly pack each bag.

Planners can charge for collection through selling tags or stickers which specify the size of the container and are affixed to various size bags. Tags and stickers, however, can fall off in rainy or cold weather.

A community also must decide how to structure prices. Since container and pricing decisions are closely related and often present tradeoffs, planners must have a strong sense of their program's ultimate goals.

For example, some communities might want to avoid complex billing arrangements that could place serious demands on their solid waste agency. In this case, using a single large can and billing under the simplest pricing structure, the proportional (or linear) rate system might be appropriate. Households under this system are charged a flat rate per container that is set out. Bags (or tags/stickers) also could be used, which eliminates the necessity of billing residents.

However, since waste generation rates can change, proportional rates could fluctuate revenues, creating cash flow problems and ultimately limiting the incentive to reduce waste.

A variable container rate system can offer a greater waste reduction incentive to its residents. Under this system, different rates are charged for different size containers. Cans vary from 90 to 10 gallons. Rates charged average from $3 to $5 for the largest size to $1 or less for the smallest. Since variable rates could result in revenue fluctuations, the different rates make this system more difficult to administer and to bill.

One way to avoid uneven revenues is through using a two-tiered or multi-tiered rate system. A hybrid of traditional management systems and unit pricing, this type of system uses a reduced flat fee to help en-sure that revenues never dip below a certain level. The flat fee guarantees a steady cash flow to cover the fixed costs. Per-container variable rates can then be added, typically at a lower level than in proportional or variable container rate systems.

The variable rate will help cover tipping fees and other marginal or variable costs. For example, a community that charges a flat $10 per month plus $1 for each 30-gallon bag disposed could use a flat fee plus a single container (two-tiered) rate or a flat fee plus variable container (multi-tiered) rates. A flat fee reduces the waste reduction incentive.

Choose Your Options Now, decide which service options to offer, such as recycling or composting. These programs are typically more successful when residents know they would otherwise have to pay to have such wastes disposed. And effective recycling and composting programs mean a more effective unit pricing program. Recycling carries a price tag; to pay for these services, communities can use a flat fee specifically for recycling and composting or increase the per-container fee.

Planners must consider how to administer the unit pricing program for low-income residents and multi-family housing, since ensuring their participation has some inherent obstacles. Consider which service options are needed and whether their costs can be covered by the revenues the new program will generate.

Multi-family housing. Since waste often is collected from these residences collectively, it's difficult to offer a direct incentive to reduce set-outs. Addressing multi-family housing issues can add to the program's cost.

The building manager could sell tags or bags to residents, or modify dumpsters or garbage chutes to operate only with a magnetic card or other proof of payment. Consider whether these costs would be balanced by the benefits of including all multi-family residents in the unit pricing program.

Backyard collections. If a significant number of residents (such as elderly or disabled persons) might have difficulty bringing bags or cans to the curb, backyard collections could be offered at a higher price. The cost of backyard service also might be built into the per-unit fee charged to all households.

Low-income residents. Assisting low-income residents represents an-other potential cost. Consider structuring a program to enable low-in-come residents to participate at a re- duced or zero cost. Either plan for lower revenues or increase the per-unit fee.

The Balancing Act To develop a rate structure, first estimate how much solid waste will be collected. Current waste amounts are only a starting point since unit pricing can significantly affect generation.

After the program begins, residents will reduce their waste generation until a "steady state" is reached. Here, generation has dropped and the municipality has adjusted its operations.

Next, decide which types of containers to use; whether to adopt complementary programs; which service options to include (if any); and how to work with residents of multi-family housing and low-in-come residents.

Then estimate the costs of your program. Be sure to include both the start-up costs (training personnel and purchasing containers) and the ongoing costs (labor and tipping fees).

Try setting tentative prices; borrow unit pricing rates from similar communities or adapt from national price ranges. To estimate revenues, divide the total monthly generation volume (in the steady state) by the volume of the containers.

This figure yields the estimated number of containers that are collected per month. Multiply the result by the per-container price to estimate monthly revenues. Compare the estimated costs with projected revenues.

For some communities, achieving a close balance will be important. Others might seek revenues beyond the program's cost for equipment improvements or other related activities.

If the first cost-revenue comparison doesn't produce an ideal bottom line, use the flexibility of unit pricing to balance your program. Avoid changing rates drastically, however, because it might upset residents. Instead, consider scaling back ex-pensive program options. On the other hand, dropping rates too low to compensate for projected surpluses could stunt the waste reduction incentive.

Consider establishing prices at a level slightly above the cost of the unit pricing program to encourage source reduction and ensure that there will be sufficient revenues to cover shortfalls. Since residents will only support a program that they feel charges a fair price to solid waste services, there are limits to this strategy.

To be successful over the long term, you will need to carefully balance the desired services against revenues. Keep revising your rate structure until you have a program that offers the services you need at a price residents can support.