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Eugene Weekly : Coverstory : 4.8.2010

 

Trash + Cash

Eugene’s garbage goes corporate

By Alan Pittman

illustration by Sean P. Äaberg |  www.goblinko.com

Psst!

Want to know just how the city is charging you fees that go up about 12 percent a year to guarantee an 11 percent profit for a big California corporation? You can’t; it’s a secret.

Last year the California-based corporation Waste Connections paid $49 million to buy Sanipac and about 70 percent of Eugene’s $22 million-a-year trash collection business with it.

The city of Eugene limits competition for that lucrative trash business and sets local garbage rates to give the $2.8 billion Waste Connections an 11 percent profit.  

How exactly do city staff do that? They aren’t telling. The city keeps secret all the budget information that Waste Connections gives the city so the public servants can set the corporation’s profit margin. 

“That’s all private information; that’s confidential information,” said the city’s solid waste manager, Ethan Nelson.

The city’s secrecy on garbage bills violates the city’s official goal of transparency. It also appears to violate state law. The State Public Records Act requires that such trade secret documents must be available if their release is in the public interest. Courts have generally held that the public has a strong interest in how much they are charged.

And those monthly garbage charges can add up. In Eugene, residents pay $236 a year now for 32-gallon pickup. That’s more than twice the $102 a year in taxes they pay for the city’s recent $36 million street repair bond measure. 

From 1998 to 2007, the 32-gallon charge almost doubled, going up an average of 9 percent a year. The charge for the one-yard dumpsters that businesses use has increased 141 percent. The one-yard dumpsters now cost more than $800 a year. The financially struggling 4J School District pays Waste Connections about $264,000 a year for hauling trash.

What’s all that money paying for? The city’s secrecy has made it a mystery. Over the last dozen years, the city has added yard debris pickups, but that doesn’t appear to account for all the money. 

The city decided to increase the profit margin for Sanipac from 6.5 percent to 11 percent in 1998. Many local businesses struggling to stay afloat in the recession while paying their garbage fees would gladly settle for the lower profit margin. But the city argues the profit increase was needed to keep up with profits haulers were making in other cities with similar garbage fees.

The city doesn’t adjust the corporate profit margin to account for what businesses and residents can afford in a recession. 

Although the city won’t release the financial information it gets from Waste Connections, it is possible to make a reasonable guess at the money the corporation is making off Eugene. Based on the market share and profit target numbers from the city and what SEC filings say the corporation paid for Sanipac and similar companies, EW estimates Waste Connections could generate roughly $15 million in yearly revenues in Eugene with a profit of about $1.7 million.

But with all the city secrecy, it’s impossible to tell if the 11 percent number is actually the real profit the city is giving the corporation out of citizens’ pockets. The actual profit margin could be much higher. The city says it checks on some of the numbers the corporation gives it to justify its profit. But with the corporation holding all the information cards, it’s hard to see how a few city administrators are a match for a corporation that reported $1.2 billion in revenues last year. 

The city bureaucracy also appears to have little incentive to control rising garbage fees. The city takes a cut of garbage revenue at a rate of 2.5 percent for residential and 6 percent for commercial. The city cut is essentially tacked on to the garbage fees everyone pays. The more the city allows Waste Connections to charge, the more money the city gets. 

The city had proposed increasing its cut by 5 percentage points last year to raise money for roads, but the City Council backed down from the idea for now.

If the corporation lies for profit, city regulations include fines of up to $1,000 for violations if caught repeatedly. That might not be much of a disincentive considering the millions of dollars at stake. The city could also revoke Waste Connections’ operating license in Eugene, but that appears unlikely given the huge piles of trash that would accumulate.

Eugene’s Nelson said he doesn’t think the corporation would lie for money. “We have good relations with the haulers,” he said.

But other big trash corporations have been less than honest. In 1998 Waste Management, the number one waste corporation that Waste Connections says it wants to unseat, was involved in a $2.9 billion accounting scandal. In New York, the Mafia monopolized the city’s garbage hauling business until the mid 1990s.

In 2008, The Seattle Post-Intelligencer reported that Waste Connections was involved in questionable campaign con-tributions to a county executive who oversaw the corporation’s trash contract. 

As a publicly traded company, Waste Connections is under a lot of pressure from Wall Street to produce ever-increasing profits. The corporation has also pursued an aggressive acquisitions strategy that has left it with huge payments on $870 million in debt.

Nelson said the city expects new financial information from Waste Connections by April 15 to use to set rates that will meet the city’s 11 percent profit target for the corporation. “There will more than likely be a rate increase this next year,” he said.

But despite the big money involved, there won’t be a public hearing on the fee increase. Elected officials won’t even discuss it. In Eugene, garbage fees and garbage profits are left to the sole, secret discretion of the unelected city manager.

A big part of Waste Connections’ business strategy for increasing those profits is monopoly, according to it’s 2009 annual report to investors. 

The report said its “corporate strategy targets” small cities with rules that provide “competitive barriers to entry.”

Ostensibly, the city of Eugene does not guarantee a monopoly for Waste Connections. But the six other haulers divide up 30 percent of the market compared to Waste Connection’s 70 percent. 

It’s unclear how the other waste haulers can compete effectively, under the rules. Their rates are set by the city based on the data from Waste Connections, so they can’t compete on price. “You can’t go in and undercut someone. If you do it’s a violation of the rules,” Nelson said. “You don’t want garbage wars.” 

All the haulers are also required to offer the same basic level of service, so there is little room to compete on quality either. 

It doesn’t appear that most customers actually have much choice in haulers anyway. The city doesn’t explicitly divide the city into exclusive territories for each company, and customers can try to switch haulers. But a company is unlikely to want to drive a big truck across town to pick up trash from a single house. Sanipac officials have previously said the company controls 85 percent of the residential trash market in Eugene. 

The city allows haulers to refuse service, and the city doesn’t track which neighborhoods are dominated by which haulers or the number of people who haulers have rejected, according to Nelson.

Waste Connections appears to want to aggressively guard its near monopoly position in Eugene. After three disgruntled executives left to start a rival hauler in Eugene, the corporation reportedly filed a lawsuit against them last month for violating confidentiality agreements. 

The company has also filed a legal challenge against the city having granted the last of its eight available hauler licenses to the new rival. A hearing is scheduled for April 21 on the challenge.

The city could conceivable grant more than eight licenses, but current city rules make that unlikely. A new hauler would have to prove that existing haulers are unable to provide garbage service.

Waste Connections also aggressively pursues increased market share through acquiring competitors, according to its annual report. Current city rules may allow the company to buy up competitors and hoard seven of the eight available licenses until it held 99 percent of the local trash business, according to Nelson. Nelson said that legal “gray area” in the city rules could create “trouble” and may need to be changed. “It raises those questions; for a long time, it had been really quiet.”

Another way Waste Connections increases profits is through aggressively lowering labor costs, according to its annual report. Earlier this year the corporation placed an ad for replacement workers when its unionized drivers here threatened a strike over health care benefit cuts and other issues.

The company appears less concerned about controlling the labor costs of its CEO who made $2.3 million in total compensation last year, Business Week reported.

In Texas, Waste Connections has lost a case charging unfair labor practices. The company is appealing and is 87 percent non-union.

The city of Eugene has a goal of increasing recycling as a way to reduce greenhouse gasses. Local recycling rates have been essentially flat since 2000 at 46 percent, according to state data for Lane County. 

But Waste Connections may not share the city’s goals to reduce, reuse and recycle. Less trash means less profits for the company. The corporation’s annual report states: “Competition in the disposal industry is also affected by the increasing national emphasis on recycling and other waste reduction programs, which may reduce the volume of waste deposited in landfills.”

The corporation has also run afoul of environmentalists. In 2002, Waste Connections was fined $2.2 million for illegal dumping in Oklahoma. In 2004, the company agreed to stop illegally dumping hazardous medical waste in New Mexico. Other environmentalists are battling the corporation over locating or expanding its landfills.

Nelson said the city of Eugene plans to review its garbage system to see if any changes are needed. Eugene’s system has made Waste Connections the largest private waste company in the state. “Is it the best approach? I don’t know,” Nelson said.

Springfield, Salem and other cities put their garbage out to competitive bid for exclusive contracts. Some cities have an open market price competition, and others have a mix of systems. 

A century ago, Eugene citizens became fed up with the corporations controlling their water and electric services and established EWEB. The local public utility is now the envy of many cities being wrung for profits by corporate utilities. 

The Eugene City Council has the power to create a similar public utility now for trash. Waste Connections warns its investors that cities where it operates “could in the future choose to maintain their own waste collection and disposal operations.”