After The Control Is Gone

Mary L. Pranzo

Is your solid waste facility economically viable? If you relied on flow control, possibly not. In fact, the Carbone v. Clarkstown, N.Y. decision has forced many owners and operators to reassess their facilities' financial viability under the harsh light of economic realities. And in some cases, it's become apparent that some projects would not survive without the artificial support of legal flow control.

Many now are recognizing that, sometimes, the basic, underlying economics and competition - called "economic flow control" - offered little support toward the success of an existing or planned project.

Bond rating agencies also are considering these same issues. First, operations that had received an investment grade rating had to be re-examined to determine if the original ratings would change or even revise downward. Second, rating agencies had to develop new guidelines for those financing new facilities or expansions.

While the general purpose of both flow controls is similar - to provide certainty in waste flow, revenue flow and enhanced finance ability - legal flow control often works against market forces, while economic flow control reflects market forces.

Now, however, "flow control" requires a solid understanding of basic economic concepts. Juris-dictions must focus on the waste levels to be directed to the facility rather than on the market-directed levels. Moreover, they must ensure that the market will continue to direct that waste to the facility according to the financing or expansion schedule. Thus, facility owners and operators are discovering their role and functions as market participants.

To be successful, a jurisdiction should consider:

* market structures and the types ofcompetition;

* the long- and short-run;

* supply and demand;

* change in demand and change inquantity demanded;

* elasticity of demand;

* costs;

* marginal costs, marginal revenues;

* pricing and marginal cost and average cost;

* economies of scale; and

* financial and fiscal flexibility.

Market Structures Most landfilling services are standard: There aren't many balefills, and the variations in daily covers wouldn't be a significant element to haulers in determining which landfill to use. A hauler or a city may have a contract, but landfilling one ton of municipal solid waste is similar from one landfill to another.

A potential difference may be that one landfill currently complies with Subtitle D, so the long-range potential for user liability might be less.

However, if all other factors are equal, landfilling is perfectly competitive in terms of service and standardization. For solid waste facilities, this nearly monopolistic market structure is close to legal flow control in waste and revenue flows to pay debt service. More competition means less economic flow control. Analyzing the market's structure helps determine the viability of economic flow control for an in-dividual solid waste facility.

Waste Flow Analysis The main determinants for a solid waste facility are its tipping fees and hauling costs. If no monopoly exists, or if there are only a few relatively minor-sized competing facilities, then price should be kept within an overall competitive range. If the price is too high, it can encourage competition.

Fresno County, Calif., hovers closest to a monopolistic market structure, because there are not many landfills. Of those landfills operating in the county, none has the current or future capacity to handle the waste flow received by the American Avenue Landfill. The Fresno County Solid Waste Management Plan of 1985 designated the American Avenue as the county's regional landfill and mandated that privately-owned landfills close when the waste footprint capacity is reached.

In Fresno county, the recent trend has been for landfill closures: The Southeast Regional Landfill closed in 1990; the city of Fresno Land-fill closed in 1987; the privately-operated Chestnut Avenue Land-fill, closed in 1993; and the Chateau Avenue Landfill, was projected to close in 1996. Thus, in terms of market structure and competition, there may be economic flow control in Fresno County.

Another aspect of economic flow control analysis is related to geography. Although Fresno county's geographic area is large - nearly 6,000 square miles - it is possible for haulers to transport waste to landfills outside of the county. However, the out-of-county landfills tipping fees are higher, and they cannot handle the same volumes of the American Avenue site.

Since the city of Fresno's landfill closed, Fresno County and the cities of Fresno and Clovis agreed that the county would develop American Avenue into the regional landfill to be used by both cities.

In return, the city of Fresno guaranteed to deliver all its solid waste to the landfill, and specified a minimum tonnage, which was computed to enable the city to reach its 50 percent diversion goals.

According to American Avenue's records, some out-of-county waste is delivered to the landfill while some goes facilities in other counties because of lower overall costs (tipping fees and transportation). So, while Fresno County has considerable price control, increasing the tipping fee can have an effect on waste that is currently being generated in Fresno County and hauled to American Avenue.

In terms of out-of-county facilities, American Avenue still has a strong basis for continued economic flow control. For example, in Kern County, approximately 100 miles south, the tipping fees are comparable to Am-erican Avenue, but transportation costs make using it prohibitive.

American Avenue's tipping fee of $28.80 covers the facility's average total cost. Occasionally, disposal facilities which are facing greater competition are tempted to price their landfill or disposal service at less than their average total cost. This same issue is raised in full-cost accounting, when a jurisdiction or agency determines the cost for each activity and program.

This type of analysis will overstate or understate the benefits and costs, if decisions and/or analyses are completed and focus on the "incremental" or marginal cost and/or benefits.

The marginal costs and marginal revenues analyses are completed and analyzed together to aid in the decision-making process. Typically, though, the differences between the marginal cost and the average cost are so significant that the facility will often price itself into a corner and has little ability to recover all of its operational and capital costs. If reserves are modest initially, then that facility will marginal-cost price itself into a deficit quickly.

There are two situations when marginal cost pricing will benefit the agency:

* when the marginal cost price equals the average total cost price and

* when the marginal cost price exceedsthe average total cost price.

The second situation occurs whenever the demand has increased significantly and has little alternatives to the agency's facilities.

Economics Of Scale American Avenue's operations history demonstrates a significant amount of economics of scale.

In 1991, the landfill received an average of 100 tons per day (tpd). That amount increased dramatically each year thereafter until it reached its the current levels of approximately 1,700 tpd.

While tonnages increased more than tenfold, the operations cost increased by a much smaller percentage. In addition, the current tipping fee - barring any pass-through surcharge increases - can remain at its current level for at least three years. During that time, the landfill will be able to finance additional expansion and to strengthen its economic flow control using competitive pricing.

Of course, not every jurisdiction or agency will be able to experience similar economies of scale. However, if they lack the economics of scale on operation expansion, the financial flexibility feature of economic flow control can be used.

One view of financial flexibility is that the agency can change with the market. For example, when competition changes, the agency has the plans and ability to alter its operation levels and to reduce its costs to compete at a lower price.

American Avenue is prepared to buy necessary equipment and increase staff as the tonnage levels change.

The current plans have back-ups for either the future decreases in tonnages due to diversion or increases because of unexpected population increases.

By managing the inherent econo-mies of scale in operations, both in terms of expansion and contraction, and maintaining financial flexibility in both short- and long-range operations and planning, American Avenue believes it will have economic flow control beyond the year 2000.

Mary L. Pranzo is the former waste management coordinator for Fresno County, Calif., Public Works & Devel-opment Services Department.