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History of Variable Can Rate
In 1989, the City of Seattle adopted an ambitious and far reaching Integrated Solid Waste Management Plan. The Plan aims to achieve a 60 percent reduction/recycling level.
While developing the plan, Seattle's policymakers focused a great deal of attention on the Solid Waste Utility's (now Seattle Public Utilities) rate structure. The issue was whether and to what extent the City should use its garbage rates to promote its recycling programs.
The City already had in place a "variable can rate structure," whereby residents paid more for additional cans of service, but policymakers were not sure the existing structure was adequate. Their basic question was:
- Should the Solid Waste Utility (SWU) increase rates for greater volumes of garbage service to encourage recycling and waste reduction? If so, by how much?
Evaluating the restructuring of rates
To evaluate the issue of restructuring the Utility's rates, staff needed to address several related questions:
- What rate structure is needed to achieve given recycling and waste reduction goals? How high must SWU raise its rates for greater volumes of service to induce customers to reduce their garbage service levels by one, two, or more cans?
- What level of inversion is acceptable to customers? In other words, how high could the Utility set additional can rates before customers would regard them as punitive?
- What types of recycling and waste reduction services should the Utility provide to complement changes in the rate structure?
Choosing an approach for the analysis
The Solid Waste Utility used several resources to reassess its rate structure and develop answers to these questions.
First, the Utility hired rates unit staff with strong economics backgrounds. These staff members brought technical expertise and credibility to the Utility's analyses and recommendations.
Second, the Utility developed a computerized rates model to assess the impacts of different rates structures on garbage disposal, recycling rates, and the Utility's financial stability. The model was developed with assistance from a consultant. The program was written in GAUS, a "higher level" programming language. It assessed the impact of different rate structures on the relative demands for garbage and recycling services, and on the Utility's revenues, costs, and financial performance (for example, net income).
Third, the Utility hired consultants with promotional and marketing experience to "test market" different rate structures and services. The Utility used its Solid Waste Advisory Committee and customer focus groups as forums for test marketing.
Findings and recommendations
Solid Waste Utility (SWU) staff analyzed the rate structure using standard economic theory and existing data about the impact of garbage rates on recycling.
Not surprisingly, both theory and empirical evidence indicated that people tend to recycle more as garbage rates increase. SWU staff also found that restructuring rates to encourage recycling would not, by itself, increase recycling. To increase recycling the Utility needed to complement rate changes with convenient service options, such as curbside recycling, curbside yard waste collection, smaller garbage service levels, etc.
The Utility obtained support for its findings and recommendations from key policymakers and groups. SWU summarized its findings in an issue paper, and presented the paper to the Mayor, the City Council, and its Solid Waste Advisory Committee. With their support, the Utility was able to implement its recommendations.
Recommendations included substantially raising the additional can rate (the charge for each additional can after one can of service), offering a "minican" service (a 19 gallon container), and augmenting the City's curbside recycling program with a curbside collection program for yard waste.
Weighing the choices
Before making its recommendations, Utility staff evaluated a variety of rate structure and service options:
- Price all units at cost of service: The Utility considered continuing to price all cans at cost of service (a practice in place since 1981). Simply getting the cans to the customers accounts for much of the cost. As a result, pricing all cans at cost of service requires that the first can cost more than each additional can of service. Cost-based pricing does not produce an inverted rate structure.
- Price additional cans of service above cost of service: An alternative to strictly "cost-based" rates was to price higher levels of service above cost of service. This is known as an inverted variable can rate structure. The intent of such a structure is to encourage customers currently subscribing to higher levels of service to "move down" (subscribe to fewer cans of service). They could do so by reducing or recycling their waste. Consequently, an inverted rate structure would tend to encourage more recycling and waste reduction than a strictly cost-based rate structure.
In 1988 Solid Waste Utility (SWU), the Mayor, and City Council concluded that an inverted variable can rate structure was most consistent with the City's 60 percent recycling goal.
The Mayor and Council raised the Solid Waste Utility's one-can rate by a modest $.20/month (from $13.55/month to $13.75/month), and raised the "additional can rate" (the rate charged for each additional can) from $5.00/month to $9.00/month.
The Mayor and Council concluded that this increase in the additional can rate would:
- Substantially increase recycling and waste reduction; and
- Send a price signal to those who generate relatively more waste that garbage disposal has a high monetary and social cost.
Close to 90 percent of the Solid Waste Utility's customers were on two cans of service or less (60 percent were on one can). The Mayor and Council believed that if the additional can rate was increased to $9.00/month, the increase would not create a substantial hardship on most customers.
It is important to note that the City's curbside recycling costs were (and are) covered by the basic garbage rate. The Mayor and Council's intent was to provide a stable source of revenue for the curbside program, and to further encourage recycling. Including the cost of curbside recycling in the base rate makes garbage disposal look more expensive relative to recycling. This makes recycling appear to be "free."
Can service options
As part of the process, more can size choices were developed. Staff decided that the Solid Waste Utility (SWU) should offer garbage disposal service options that allowed customers to save money by recycling.
With less garbage, they could reduce their subscription level. Among the options the Utility considered were a minican service (19 gallons compared to a standard 32 gallon "one can" container), and finer gradations of can sizes (half-cans, one-and-a-half cans, etc.)
The Mayor and City Council decided to adopt a minican (19 gallon container) service priced at $10.70/month. If customers used the City's curbside recycling programs effectively, they could switch to a minican and save $3.05/month (the difference between the minican and single can rate). Like the single can rate, the mini-can rate includes the cost of the curbside recycling program.
In 1992, the City began offering an even smaller level of service called the "micro can". This container is 12 gallons and was originally $9.37/month.
Options to dispose of extra waste
The Utility felt that customers might be reluctant to reduce their service levels if they did not have a convenient way to dispose of occasional extra waste. To address the problem the Utility considered "extra waste bags" and/or "trash tags", which customers could place on extra bags of garbage. Customers could purchase the tags or bags through grocery stores and community service centers.
The Mayor and Council preferred the "trash tags". Customers could dispose of extra waste by attaching a Utility-supplied sticker to each bundle of waste. Stickers were available for $5.00 each at the Solid Waste Utility's main office, certain grocery stores, and the City's Community Service Centers. Residents could place extra waste at the curb in a plastic bag, packing box, or bundle on their regular garbage collection day. Extra garbage was not collected without a sticker.
Currently, the city has automatic billing for extra garbage. With this service, customers are automatically billed for any extra garbage beyond their subscribed service level. Customers can still use trash tags as described above if they do not want automatic billing.
Other options for recycling
Solid Waste Utility (SWU) staff concluded that rates structured to encourage recycling would not be effective unless customers had convenient substitutes for garbage disposal. For example, it would be difficult for residents to reduce their service level from one can to a minican if a convenient recycling service was not available.
The City's curbside recycling program was already in place by 1988, when the City began evaluating SWU's rate structure. Other recycling program options were needed. The Utility identified curbside yard waste recycling as the most cost effective of its service options.
Prior to 1989, yard waste accounted for 17 percent of the City's residential waste stream. The Mayor and Council concluded that many residents could reduce their garbage service levels if they were able to recycle their yard waste. They approved a fee-for-service yard waste collection program. The Utility began offering curbside yard waste collection in January 1989.
The City also considered adding plastics and other materials to its curbside recycling program. After an experimental pilot, the City also added PET plastic bottles to its curbside recycling program.
The City's goal is to recycle and reduce 60 percent of its waste. It makes sense to evaluate the changes in the Solid Waste Utility’s rate structure and services in light of their contributions to achieving the 60 percent goal. The more steeply inverted rate structure, the minican service, and the yard waste collection program all appear to be aiding the City's progress toward its 60 percent recycling goal.
87 percent of the City's single family garbage customers subscribe to one can or minican service (62 percent are one-can customers, 25 percent are minican customers, 5 percent subscribe to microcan service). Only 8 percent subscribe to two or more cans of service.
These percentages contrast with the situation in 1988, when 60 percent of single family customers subscribed to one can and 39% subscribed to two or more cans.
Recycling and yard waste collection tonnages increased dramatically over the first two and a half years of the program. The increases were most dramatic in 1989, when the minican rate, yard waste collection program, and $9.00/month additional can rate were introduced.
None of the recent changes in rate structure or service have been unsuccessful. It is difficult, however, to clearly evaluate the performance of certain changes at this time.
Sorting out the separate impacts of rate incentives and new programs on the City's recycling rate has proven difficult. It appears that both are contributing to the success of the City's recycling efforts.
Issues of concern
Variable can rates can make critical contributions to recycling and waste reduction efforts. They are not without liabilities, however. Policymakers should consider three main issues of concern:
- Personnel requirements.
- Exposure to financial risk.
- Illegal dumping.
Administering a variable can rate structure has required additional staff resources for several sections of the Utility.
Billing and customer service
The wide variety of services and rates offered by the City has generated a significant increase in customer inquiries. Rates-related calls include customer requests to change to a lower service level, and inquiries about what costs are included in rates.
Promotions and public information staff
Additional promotions and public information staff are required to make a variable can rate structure work. These additional staff members are the primary "educators" of the Utility's customers, making sure that they are aware of their service options.
Seattle has a trained rates staff with a strong economic background, who design and implement the variable can rate structure.
Implementation of variable can rates can also increase a Utility's exposure to financial risks. Revenues and costs can become less predictable. Seattle, for example, did not anticipate the dramatic switch from two cans to one can of service when the Utility's additional can rate increased from $5.00/month to $9.00/month. This switch played a major role in the Utility's 1990 revenue shortfall.
To manage these financial risks, the Utility monitors aggregate subscription levels, revenues, and expenses every quarter. If the Utility is not recovering enough revenue to cover expenses, it has to make the difficult choice between cutbacks and an early rate increase. Agencies considering variable can rates should take the subscription responses other cities have experienced into consideration, and must be prepared for careful monitoring.
A third concern is that higher additional can rates may encourage illegal dumping. Seattle experienced increased illegal dumping for several months after rate increases in 1987 and 1989. There is no proof that variable can rates contributed to this problem (it may have resulted from higher rates at the City's transfer stations). While problems were not substantial, they did raise concerns among City officials. In response, the City passed an Illegal Dumping Ordinance to prohibit and control dumping. The Utility maintains a small staff to monitor illegal dumping complaints and enforce the ordinance.