INTEROFFICE MEMORANDUM
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1 INTEROFFICE MEMORANDUM DATE: September 8, 2008 TO: Public Works Commission FROM: Neal S. Oldemeyer, Director SUBJECT: Allied Waste Systems Franchise Agreement ISSUE Staff is seeking the commission s approval to finalize the remaining details of a 10-year extension to the Allied Waste Services () franchise agreement so that the agreement can be moved forward for council approval. The proposed amended franchise agreement and contract execution and operation plan are provided as Attachments A and B. The most significant changes are in the implementation of automated service for residential trash collection and collection of co-mingled recycling. BACKGROUND The development of the city s strategic plan has driven the successful completion of a long-term and detailed solid waste strategic plan. This solid waste plan contains nineteen recommendations (Attachment C), many of which require implementation of new or improved collection and recycling services. Recommendation C-3 says, The City should initiate negotiations with Allied Waste to extend the existing collection contract for a period of no less than seven years. There are several reasons to move in this direction: generally has performed well; new programs could be implemented more quickly; disruptions and cost impacts to the customer base, particularly commercial, will be minimized; and the consultant advised that a bid process will be lengthy, costly, and will likely end with the retention of the incumbent contractor, but with higher rates. For the purpose of defining a successful negotiation process, measures of success were identified and are included as Attachment D. Additional guidance was provided by the commission and council in our previous meetings. Staff believes that the negotiations have been successful. Following are key points that have been addressed by the 1
2 negotiations and that are included in the new franchise agreement and associated contract execution and operations plan. Fully Automated Trash Service. The majority of the negotiation effort has been spent on developing concepts for new residential services. Staff originally suggested that a service could be provided where every home received a trash cart and would be allowed to set out additional owner-provided cans, all for one flat rate. When looked at in detail, this concept proved to be extremely inefficient and more costly, as compared to setting out carts only. As a result, staff is recommending use of carts only with the provision that residents may request more than one cart. Co-Mingled Recycling. Staff is also recommending using carts to provide co-mingled recycling on an every-other-week basis. Fully automated service allows this recycling enhancement. More materials will be diverted from the landfill. Revenues, however, will be reduced because of the requirement to separate the materials. has estimated over a 50% increase in materials collected, but a drop of about 50% ($350,000) in revenues. Green Waste. Staff is not recommending the implementation of a residential green waste program. There are two reasons. First, placing green waste in the Ada County landfill is positive from a greenhouse gas perspective. When the green waste is placed in the landfill, it decomposes and generates methane gas. This gas is captured and is used to power a co-generation facility, which allows electricity to be generated from a non-virgin carbon-based fuel. Therefore, no new carbon-based gases are released into the atmosphere. Staff did substantial research to see if there were any other reports or data that would contradict this concept. We found no conflicting information. The second reason is cost. Green waste carts would need to be placed at each home and additional collection routes would need to be established. priced this service at an additional $5.25 per household. Ada County is considering putting in place a commercial composting facility. Like the city, the county is struggling with the pros and cons of moving in this direction. It may be appropriate to consider collaborating with Boise State to further research this issue. Expense Review. Staff worked closely with and our consultant, Chris Bell, to review the costs for the residential services. We concluded that the proposed rates and assumed production levels are very competitive. also conceded to allocate the cart and truck capital costs over a 10-year period rather than the 5-year period originally proposed. Staff agreed to recognize Allied s cost of capital at 8%. In years past, the interest was absorbed as an element of the 18% targeted gross profit margin. Chris Bell s report is provided as Attachment F (to be sent under separate cover). The commercial and roll-off analyses were completed much as they had been in the past. The roll-off services were reduced by one route. Variable costs were lowered accordingly. Two new commercial routes were recognized largely to support the 2
3 significant growth in commercial recycling. Additional repair and maintenance costs were allowed to rebuild several of the trucks and repair older containers. Wage increases were set at 3% and medical increases were set at 11% (same as Boise City s). For costs other than fuel and depreciation, an inflationary value of 4% was applied. The fuel target will continue to be set at $3.00. Anything below this amount will be reimbursed to the city. Anything above this amount, the city will pay to. The negotiated increase for commercial is 4.9%, while the increase for roll offs is 4.0%. The residential rates are shown below. Residential Services Trash Recycling Total Current Price (2008) $5.37 $1.91 $7.28 Add price adjustment Add 4.5% inflation Adjusted Current Price (2009) 6.10 $ Proposed Price (2009) Costs have not been adjusted for fuel. An increase in recycled materials may reduce landfill costs by $0.30 to $0.35 per month per customer. We have flexibility in setting the reimbursement rate and customer costs for an additional 95-gallon cart. It could range from $0.65/month up. A higher rate would encourage recycling, but increase the possibility of illicit dumping. A lower rate would encourage requests for additional carts. The commission s guidance would be greatly appreciated. Profit Margin. The gross profit margin, calculated on the same basis as years past, is 19.8%. This is higher than the 18%, which we had previously allowed. However, 18% was an unfair expectation within the context of this negotiation. In years past, we had expected to take from this 18% profit margin corporate overhead, taxes, interest and profit. In our current negotiations, we are asking to make nearly a $13.0 million capital investment, which will create an additional average annual interest expense of about $600,000. If you back this expense out of the gross profit, we have negotiated down to about a 16% margin, which is a fair comparison to the past target of 18%. Another way to evaluate our result is to compare it against the profit margins of Allied s most significant competitors. Staff researched financial statements from, Waste Management and Waste Connections. These numbers were used to compare the proposed 2009 pricing structure against companies that would likely submit proposals if a competitive RFP were issued for solid waste services. The numbers were adjusted to provide a better apples to apples comparison by adding in landfill costs. The results are shown below. Staff will provide additional explanation at the commission meeting. WM WM WC WC (Proposed) 3
4 16% 17% 15% 17% 21% 22% 13% Collection and Hauling Equipment. New automated trucks will be required for residential trash and recycling services. These trucks will be powered by the new generation of compressed natural gas (CNG) engines. The trucks cost more, but the great majority of the vehicle cost difference will be covered by federal tax credits. It is expected that any additional maintenance costs, which should be minimal, will be covered by fuel savings. Clean Energy is willing to put in a fueling station at the facility. Boise contracted with WIH Resource Group to research the use of CNG fleets within the solid waste industry. The results were positive leading to staff s recommendation to move forward with a CNG fleet in Boise. The new CNG engines are reliable, offer similar torque and horsepower production, run quieter and reduce greenhouse gas emissions. The WIH Resource Group report is provided as Attachment E. The Key Issues and Recommendations begin on page 19. Public Outreach and Education. The city will assume the leadership role in public outreach and education. This action does anticipate the requirement for additional inhouse staff. Staff will be working closely with and community members to roll out the new residential services. We anticipate drawing upon focus groups and looking at the best practices from other communities that have converted to wheeled cart services to determine the potential issues and how best to address them in advance. A strong emphasis will be placed on informing residents about co-mingled recycling and green waste. We need to help the residents understand that it is environmentally acceptable to place grass clippings in the trash. During the cart delivery effort, staff also believes there is an opportunity to distribute composting bins to those who would like them. Technology. has agreed to put in place a GPS-based route software to gather collection data and monitor collection route progress. The cost of this software and hardware is $70,000. Customer Service Standard. Staff researched other contracts for best performance measures to incorporate them into the current standards, which are already quite stringent. Additional standards will focus on collection performance, customer service representatives performance, and container maintenance and management for residential and commercial customers. RECOMMENDATION Staff has completed the financial negotiations and is working with on the details of the proposed amended franchise agreement and contract execution and operation plan. It 4
5 is recommended that staff be given the approval to finalize the details of these documents, and provided there are no significant changes, take them forward to council for approval. MOTION I move that staff be given the approval to finalize the details of the amended franchise agreement and contract and execution plan, and providing there are no significant changes, take them forward to council for approval. H:\msoffice\word\PWC\PWC- Franchise Agreement.doc 5
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