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Rate Structure Design

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The goal of rate structure design is to determine the price that solid waste planners will charge residents for each container of garbage they set out for collection. Communities usually focus on setting a price that will allow the new program to pay for itself-or at least cover a certain level of their solid waste management costs.

Throughout the pay-as-you-throw (PAYT) planning process, solid waste planners make choices on a wide range of program options. Every program decision, from selecting complementary programs to dealing with residents of apartments/multi-family housing, will affect a community's rate structure. To account for program costs and the level of revenues needed to pay for them, most communities embark on a thorough rate structure design process.

Program goals

When beginning to design a rate structure, communities often refer back to their program goals. A rate structure can be used to support such key goals as:

Well-designed rate structures also can help communities to control illegal diversion and prevent enforcement difficulties. In addition, communities will need to decide early in the planning process which pricing system-proportional, variable rate, or multi-tier-to use with their rate structure. A decision about whether to base the per-container fees on bags, tags, stickers, or cans also needs to be made.

To arrive at a price per container that will help them meet their goals, planners typically use one of three approaches (or a combination of these approaches): checking with neighboring communities, estimating a price based on program costs, and performing an advanced rate setting analysis.

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Neighboring communities approach

Communities that have launched PAYT programs are an important source of information on rates. One approach to setting a unit price is to examine programs in nearby cities or towns, particularly those with similar demographics. Planners sometimes choose to find communities with comparable disposal costs and tipping fees, complementary programs, and pickup frequency. After learning what size containers are used and the price for each, planners can adjust this rate to fit their community's goals. Others use neighboring rates as a starting point for more extensive calculations.

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Estimating the per-container price

Math Symbols Graphic A second approach communities use is to review data on program costs and the estimated amount of waste collected each year to calculate a price per container. Planners usually focus on the annual costs of their program and where shifts in program costs could occur. Categories of program expenses could include:

Depending on a community's goals and overall approach to rate structure design, costs for a solid waste program with PAYT may increase, decrease, or stay approximately the same. Communities often emphasize that PAYT need not cost more than the existing solid waste program. It is just a different way of structuring the delivery of services.

The next step is to estimate the annual number of containers residents will use once the program is implemented, based on the total annual tonnage of waste collected. (Tonnage can be calculated by checking data on the weight of residential materials disposed of each year.) First, planners often determine the average weight of each container size they will provide. Then, the estimated annual tonnage under the new program is divided by the average weight per container to arrive at the number of containers residents will set out each year.

Once costs have been estimated, planners can divide this figure by the annual number of containers they expect residents to use. This results in the approximate per-container fee that will enable a community to cover the costs of PAYT and other solid waste programs. Because residents have an incentive to reduce and recycle, certain program costs (including labor, equipment, and tipping fees) might be reduced. Other budget areas might need to be increased, such as recycling and other complementary programs.

The cost and revenue calculations planners use with this approach can be simple or complex, depending on the kinds of data and the amount of expertise available. To help develop these estimates, communities often use informal worksheets or other tools (see below).

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Advanced rate-setting approach

In calculating an appropriate unit price for their program, some municipalities utilize an advanced approach to rate structure design: setting rates based on a comprehensive analysis of projected waste amounts and likely PAYT program expenses. Performing this detailed level of analysis requires a greater amount of staff expertise. Some communities call in accountants or economists skilled in utility rate setting for this work. In addition, spreadsheet software or computer programs capable of modeling rates can be used to help explore different cost scenarios.

Communities usually select an approach based on the sophistication of the analysis and the resources available to them. Whichever approach is used, planners will need to review the per-container fee they develop in light of the community's goals as a final step. Communities often seek a price that they feel residents will find reasonable while still covering some or all of the program costs. No two programs will share the same bottom line. Ultimately, planners will need to determine a price for their containers based on their program's unique goals and circumstances.

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Additional resources

For more detailed information on how to use estimated waste amounts, costs, and revenues to calculate a per-container fee for your program, go to the rate structure design worksheet (Worksheet 5 in the set of seven worksheets (PDF) (21 pp, 331K, about PDF) in the Pay-As-You-Throw Tool Kit.

For answers to questions about developing container prices for a PAYT program, visit rate structure design in the Frequent Questions section of this Web site.

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