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Cost concept drives solid waste management.

Successful solid waste management programs depend on effective rate structures and, while relatively new to solid waste systems, cost of service is rapidly becoming an important concept.

"Cost of service" means the cost of providing a particular type of service to a particular class of customers. When rates are based on cost of service, they are designed to recover the costs of providing specific services from the customer using those services.

Utility services, such as water, waste-water, natural gas and electricity, have used cost-based rates for years. These utilities commonly conduct a cost of service study in connection with rate adjustments to ensure that utility rates are properly related to the cost of providing the service. As the solid waste industry continues to become more complex and costly, it is rapidly joining other utility services in developing specific methods of setting rates for all solid waste management services.

The evolution of ratemaking in other industries has taught an important lesson: as costs increase, cost-based rates become an increasingly important tool to send correct price signals to customers. A well-designed rate structure can provide incentives to use services wisely, charge for services according to the cost of providing the service, and promote equity in rates for different classes of services.

Rate-Setting Principles

Several important principles must be incorporated into a successful cost-of-service-based rate structure.

First, rates should recover costs from customers fairly and equitably. Second, rates must comply with appropriate local, state and federal requirements. Third, rates must be easy to understand, implement and administer. Fourth, rates must be adjusted in a manner so as to maintain revenue stability. Fifth, the rate structure should provide appropriate incentives to encourage waste reduction and promote recycling.

Implementation of an effective solid waste rate structure must successfully balance all of these factors.

Determining the cost of service for a solid waste system requires a detailed cost of service study that incorporates information about operation and maintenance costs, disposal methods and costs, franchise agreements, billing procedures, rate ordinances, solid waste management plans, number of customers, and type and quantity of waste. The success of any cost of service study and rate design depends on the availability and accuracy of this information.

In many cases, solid waste accounting systems have not been set up to facilitate cost-based ratemaking as have the accounting systems for other utilities. Even in cases where detailed data is not available, however, it is possible to perform a cost of service study by adjusting data that is available based on the knowledge of programs and detailed information about similar systems.

Conducting a Waste Cost Study

Conducting a cost of service study consists of several fairly straightforward steps. These first step is to determine the overall revenue required for the system; that is, the total cost of providing services which are to be met through a rate structure. Once the overall revenue requirement is identified, it is separated into functional components. Functional components include customer, quantity and direct assignment. Customer costs are those that vary with the number of customers serviced such as billing and portions of drive and truck time. Quantity costs are costs which vary with the volume or weight of waste disposed, such as tipping fees. Directly assigned costs are costs which can be directly identified as serving a particular customer class. Some recycling and other special services fall into this component.

Finally, the costs separated by functional components are further allocated to customer classes based on the specific service characteristics of those classes. These include the number and type of customers serviced, the quantity of refuse collected, and the recycling and other programs associated with the various classes of service.

Customer classes consist of groups of customers that demonstrate like usage characteristics. Typical classes include curbside/residential, commercial/ dumpster and drop boxes. The individual costs allocated to each customer class are summed to determine the total cost of service for each class.

Analyzing the total revenue requirement shows the need for any adjustment in the overall level of revenue to be derived from rates, and the allocated cost of service study provides a basis for determining how much of the total revenue requirement each customer class is responsible for paying.

The allocated cost of service study also provides unit cost data, which are essential for the design of cost-based prices for different levels of service within a customer class such as a variable can rate structure for curbside residential service.

The study also allows for ready identification of all the costs associated with recycling programs, yard waste programs and other special services. The cost of service study, therefore, is useful for determining both the cost of garbage collection and the cost of services such as recycling, yard waste collection, and transfer station and landfill operations.

Conclusion

Cost-based rate structures can encourage waste stream reduction and promote recycling by sending the correct price signal to the customer.

With the appropriate data and a detailed cost of service study, it is possible to design a set of rates that closely ties the costs of providing services to the classes of customers benefiting from the services.

Customers then pay their fair share of the necessary cost of solid waste management, and have the opportunity to have a hand in controlling the rising costs of solid waste management by reducing waste disposal levels.
COPYRIGHT 1992 National League of Cities
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

Article Details
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Author:Helsby, Dave
Publication:Nation's Cities Weekly
Date:May 18, 1992
Words:890
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