To:          Robert S. LaSala, City Manager

From:       Mark Dettle, Director of Public Works

               Mary Bradley, Director of Finance

Subject:   BCWS Proposal—Annually Renewable Franchise Agreement

Proposal Summary

On November 28 Mark Bowers and Mark Dettle met with Jerry Nabhan and William Dobert of Bay Counties Waste Services (BCWS).  The meeting was requested by BCWS to present to the City an unsolicited proposal that would fundamentally alter the solid waste collection franchise agreement.  BCWS proposed to convert the existing franchise agreement to an “Annually Renewable Franchise Agreement,” or ARFA.  Key points of the proposal are:

·         As of July 1, 2001 the contract would be converted to an ARFA.

·         Every July 1 the ARFA would be renewed for an additional year, maintaining a constant term of 10 years.

·         BCWS would reduce the contract price by approximately $285,000 for each year the contract was extended.  The original proposal called for a complicated mechanism to achieve this savings, but BCWS indicated that it was open to a more simple method.

·         The City would have to give 10 years and 90 days notice in order to terminate the contract.  Upon giving this notice, the $285,000 price reduction would be discontinued for the 10-year notice period.

Background

The current franchise agreement was awarded to Specialty Garbage after a request for proposals process in 1989-1990.  That RFP represented the first competitive process employed by the City since 1960, a period of nearly thirty years.  The RFP found that the cost of the contract could be reduced by approximately 14%, or $1.2 million per year at that time.  The original term of the contract was 1991-2001.

In 1992/93 Specialty was sold to BCWS.  During the contract assignment process BCWS requested, and the City approved, an extension of the contract to 2004.  The reason given by BCWS for requesting this three year extension was to make it easier for the company to obtain bank financing for the large number of trucks that needed to be purchased at that time.  Also as part of the assignment, the contract became based on a “cost plus” operating ratio of 90% (profit on expenses of 11.1%).

In 1996 BCWS approached the City with a request for a seven-year extension of the contract to 2011.  This request was approved in exchange for an increase to 91.5% in the operating ratio (profit on expenses of 9.3%).  This saved the City approximately $153,000 during FY 1996/97.  At the present contractor payment level, this change in operating ratio is saving the City $190,656 during FY 2000/01.

Discussion

BCWS has proposed a 2001/02 contractor payment of $14,039,177.  At this price, the $285,000 discount proposed by BCWS would represent a collection price reduction of approximately 2%.  Taken as a percent of the total 2001/02 expenditure budget for the Solid Waste Program ($28,053,367), the discount would reduce program expenditures by 1%.

While a 2% savings in a contract amount as large as this is significant, it pales in comparison to the 14% savings identified by the RFP process in 1990.

Advantages and disadvantages to the City of the proposed ARFA can be summarized as follows:

Advantages:

·         Promotes stability in service provision

·         Makes it easier for contractor to finance truck purchases

·         Reduces contract costs by 2% beginning in 2001/02

·         Builds on current good relationship between City and BCWS

Disadvantages:       

·         Makes it practically impossible for City to terminate franchise agreement

·         Virtually eliminates City’s ability to use a competitive process to procure solid waste collection services and significantly reduce expenses

·         Opens franchise ordinance to Carbone and other federal challenges (e.g. unconstitutional interference with interstate commerce)

·         Allows contractor and its employees to become complacent about customer service

By itself, the conversion of the original 10-year contract to a 20-year contract gives cause for concern on the interstate commerce issue.  Several federal court cases subsequent to the 1994 Carbone decision have bolstered the City’s position that its control of the waste stream is as a “market participant.”  That is, the City is controlling the flow of waste by participating in the business of collecting and disposing of solid waste, as opposed to controlling it by its general powers.  In deciding cases similar to Sunnyvale’s, the federal courts have closely scrutinized the extent to which collection and disposal contracts have been advertised and competitive processes used for award of the contracts.  The farther the City gets from its 1989 RFP, the weaker becomes its argument that it is not interfering with interstate commerce.  The proposed ARFA, in which the contract is annually renewed unless the City takes an affirmative action, would further weaken the City’s legal position with regard to federal case law on flow control.

The truck replacement schedule and the way in which it leaves assets on the books at the end of the franchise term in 2011 has been presented as a major reason for the ARFA proposal.  However, the replacement schedule has not significantly changed since BCWS’s seven-year contract extension request was agreed to in 1996.  If the timing of truck purchases and associated financing is the real issue, arrangements can be made to address these issues in other ways.  For example, with 10 ½ years remaining on the term, truck replacement dates can be pushed out or pulled back to more closely align the replacement dates with the 2011 end of the franchise term.  Alternatively, the City could agree to purchase the trucks for their depreciated values if BCWS were to lose the franchise in 2011.  The acquisition of the trucks by a new contractor could be made a requirement of the new contract.  A new contractor might well view this as a positive, as it would lower the contractor’s financial threshold of entry into the franchise.

The proposed ARFA would limit the City’s options with regard to the franchise agreement to an unacceptable extent.  In considering this point, it is instructive to recall the condition of the previous contractor after 25+ years without a competitive process.  Customer service had slipped to unacceptable levels and the company was being managed primarily to maximize profits, not to maximize efficiency.  While BCWS is being managed well at this time, the City must have the ability to respond to problems that could arise in the future.  Conversion of the franchise to an ARFA would virtually eliminate the City’s ability to so respond.

Recommendation

The 2% savings on the contractor payment and other advantages of the ARFA proposal are outweighed by the way the proposal strips the City of real control over who the contractor is and how long the contract runs.

We recommend that the proposal be declined.

Cc:  Mark Bowers, Solid Waste Program Manager