Fueling Headaches

Kim A. O'Connell

UNTIL THIS FALL, the rates for residential trash collection in central California's Merced County had not changed in nine years. Beginning in December, however, residents in the county's unincorporated areas are going to have to pay as much as 25 percent more, thanks in part to higher fuel prices.

In suggesting the increase to the Board of Supervisors, the county's two private waste haulers, Houston-based Waste Management and Modesto, Calif.-based Gilton Solid Waste Management, stated that operational costs had been driven upward by workers' compensation, regulatory fees and higher gas prices. As a result, Merced County residents will pay between $3 and $4 more each month. “We know no one likes to see their bills get higher, but we can only absorb so much before we have to raise costs,” Tom Clark, Waste Management district manager, told the Merced Sun-Star.

The steady increase in fuel prices since 2004 has put many waste companies and municipalities in the same position as Merced County. This year, the solid waste industry spent more than $2 billion on diesel fuel, according to the National Solid Wastes Management Association (NSWMA), Washington. Earlier this year, the association released a white paper, titled “Rising Diesel and Commodity Prices Mean Higher Garbage and Recycling Costs,” which assessed rising fuel prices and their impact on the industry.

Higher fuel prices continue to affect all solid waste and recycling haulers, NSWMA says, regardless of whether they are public or private. According to the report, a typical waste truck gets 2.8 miles per gallon and uses 8,600 gallons of fuel per year. With an estimated 136,000 collection trucks in the United States, nearly 1.2 billion gallons of diesel are used annually to collect waste. The nearly 70-cent-per-gallon (38-percent) increase in diesel prices between 2004 and early 2006 translates into an additional $800 million in annual collection-related operating costs — costs that waste companies often find difficult to pass on to customers. How is the industry dealing with it?

Root Causes

According to the U.S. Department of Energy (DOE), Washington, fuel prices will continue to be high for the foreseeable future. In response to rising oil inventories and declining world oil prices, the Organization of Petroleum Exporting Countries (OPEC) announced that it would cut its oil production by 1.2 million barrels per day as of November. With reduced OPEC oil production coinciding with growing petroleum demand during the winter heating season, the average monthly price of crude oil is projected to rise by about $2 per barrel each month over the next several months, DOE reports.

Fuel prices already have been trending upwards for the past two years. According to the NSWMA report, diesel prices increased steadily during late 2004 and 2005, driven by increased global demand for diesel, especially from rapidly developing countries such as China, as well as from Europe and other places that are relying increasingly on diesel vehicles.

In August 2005, Hurricane Katrina sent fuel prices into the stratosphere, shutting down a large percentage of U.S. crude oil refinery capacity and pipelines that transport fuel from the Gulf Coast to other parts of the United States — a situation exacerbated only weeks later by Hurricane Rita. By the end of the 2005 hurricane season, about 30 percent of the Gulf Coast oil infrastructure was non-operational, and diesel prices hit $3.15 per gallon.

The NSWMA report adds that, while gasoline prices fell in the months after the hurricanes, diesel prices declined more slowly. NSWMA states that diesel prices tend to increase in the fall when cold weather causes increased demand for home heating oil, which is similar to diesel. In addition, as Gulf Coast refineries came back on-line, they produced primarily gasoline, not diesel.

Limited U.S. refinery capacity is another factor contributing to higher diesel prices, according to the NSWMA report. Oil companies — hamstrung by increased regulations and the reality of globalization — have not increased U.S. refinery capacity to satisfy increasing domestic fuel demand. Although a few companies have announced their intent to expand capacity at some refineries, the report states, these expansions will take several years to come into effect.

Finally, the U.S. Environmental Protection Agency's (EPA) regulations requiring cleaner diesel fuel for trucks — reducing the sulfur content of diesel from 500 parts per million (ppm) to 15 ppm — are expected to increase the price of diesel in various regions. Refineries had until mid-October to make ultra low sulfur diesel (ULSD) available for sale at the pump. The increased costs associated with creating a new distribution system for ULSD will increase diesel costs and create some local supply problems and volatile pricing, NSWMA predicts. EPA estimates that the ULSD rule will result in price increases of up to 13.5 cents per gallon between 2007 and 2010.

Planning for Surcharges

In addition to the pain at the pumps, waste companies have experienced higher vehicle and container costs because of steel and resin price increases, higher vendor fees for delivering supplies and services, more expensive vehicle parts and increased utility costs. “Higher oil prices have affected the cost of delivering service to our customers and operating our transfer station, landfills, recycling centers and other facilities,” says Will Flower, spokesman for Fort Lauderdale, Fla.-based Republic Services. “Over the past two years, we have experienced dramatic increases in the cost of diesel fuel, lubricants and oils, and tires. The cost of manufacturing plastic items such as landfill liners, plastic carts and plastic lids has also increased.”

During the winter months, prices for plastic resins typically go up because they are tied to home heating oil prices. In 2005, resin prices were higher than they had been in 30 years, according to the NSWMA report, due to a number of factors, including the temporary shut-downs of Gulf Coast plastic factories following last year's hurricanes. “Another big cost is the price of steel, which impacts the price of trucks and containers,” Flower adds. “The price of trucks in 2007 will be dramatically increased due to new requirements for cleaner burning diesel engines.”

The ability of waste companies to weather these price fluctuations depends heavily on the flexibility written into their service contracts. Sometimes waste companies can add a fuel surcharge on a sliding scale that corresponds with incremental fuel price increases (see sidebar). Even if a contract does not authorize increases to reflect higher fuel costs or is silent on the subject, haulers can seek an increase, the NSWMA report suggests. Although municipal customers often are reasonable — after all, they are dealing with higher fuel prices themselves — potential challenges to contract modification include a lengthy approval process for the surcharge or being trapped in a quarterly billing cycle.

EnviroSolutions Inc. (ESI) of Manassas, Va., which owns hauling subsidiaries that operate along the Eastern Seaboard, is just one of many waste companies that have been forced to apply surcharges to their customers. “Higher fuel prices have certainly affected our cost of operation in every line of business,” says ESI President and CEO Scott Eden. “Fuel prices have impacted the transportation expenses associated with the delivery of many of the goods we purchase. While this impact is noticeable, it is generally manageable.”

ESI's fuel surcharge is indexed so the amount floats up or down on a monthly basis. “We have found that most of our customers understand the impact of fuel increases,” Eden says. “We have a handful of contracts that do not include a provision for passing through fuel increases. We have met with these customers to discuss the effects of higher fuel and, in most cases, our customers have paid the pass through.”

To stay abreast of fuel prices, ESI's maintenance manager works with the company's largest fuel suppliers to determine trends in pricing. “We make fuel buys on a routine basis and can change purchase days to make modest adjustments,” Eden says, “but our real management tool is our effective communication of the fuel surcharge that we have in place.”

Goodrich, Texas-based Pro Star Waste says that its customers have been supportive when it comes to rate hikes and surcharges. “The impact of higher costs related to fuel does not impact our small company as much as it does larger companies, as we can react quickly,” says co-owner Cindy Jones. “Both direct and indirect costs are simply passed on to our customers. Most people realize it costs more to do business, and we have had little reaction. As usual, any market changes, whether due to politics, supply and demand fluctuations, or unfunded mandates, are passed on to the public.”

Like ESI and other companies, Pro Star Waste uses a sliding scale that adjusts upward or downward according to the price of fuel that month. This adjustment is shown as a line item separate from normal service invoice amounts, Jones says. “As a relatively young company, Pro Star Waste realized the potential for such cost increases,” she adds. “In our service agreements and contracts, we included the ability to pass these increases to our customers through energy adjustment charges and Consumer Price Index [CPI] clauses.”

Making the Case

Unfortunately for waste haulers, local governments can be unwilling to alter written contracts for solid waste collection. In New York City, for example, which places a cap on what haulers can charge commercial customers, the government rejected NSWMA's request for a temporary surcharge in response to the post-Katrina spike in diesel costs. Once local governments establish their annual budgets for solid waste services, they are often reluctant to increase taxes or fees to pay for unanticipated costs. NSWMA suggests that municipalities can compensate for unforeseen price increases by being more generous when negotiating the following year's contract. For multi-year contracts, local governments may be willing to make an adjustment in future years.

Republic Services, for one, continues to use a fuel surcharge to cover the dramatic increase in fuel costs, which have come down somewhat but are still much higher than a few years ago, according to spokesman Will Flower. “Most municipal contracts allow for price increases that are adjusted according to the Consumer Price Index,” he says. “Over the past two years, the CPI did not adequately cover the dramatic rise in fuel costs.”

“It has been difficult to recover fuel costs from some municipalities,” Flower adds. “For this reason, many municipalities which have expiring contracts are seeing increases as they go out for bid on their solid waste services.”

At the end of the day, waste haulers want their customers to understand that operating and maintaining a collection vehicle is expensive, especially when those trucks are burning three to four gallons of fuel per hour. “Everyone in this business should realize that we make house calls,” says ESI's Eden. “The cost of doing so is significant. When our customers make the connection between the impact that they are feeling at the pump and the hundreds of miles we cover every day, they seem to understand. It's our job to help them make that connection.”

Kim O'Connell is a contributing writer based in Arlington, Va.

SURVEY SAYS … PRICE ADJUSTMENTS!

Several major waste companies track fluctuating fuel prices via the Weekly Retail On-Highway Diesel Prices Index, which is published by the U.S. Energy Information Administration, a division of the Department of Energy. The survey — found at http://tonto.eia.doe.gov/oog/info/wohdp/diesel.asp — provides average weekly prices for nine regions and the United States as a whole. As of early November, for example, the average weekly price for diesel was $2.50 per gallon, a slight decrease from a year ago. Costs are generally lowest in the Southeast and highest in the West.

Many companies with large fleets — from Republic Services and Waste Management to shipping giants such as UPS and Federal Express — believe that this standardized tracking system increases their credibility when they ask for flexibility in a municipal contract and hike fees for their customers. “We don't control oil prices,” says Republic spokesman Will Flower. “We do carefully monitor these costs and use the fuel surcharge to ensure that all customers are paying their share of the additional burden.”
— KAO