To: Honorable Mayor and Members of City Council
From: Phil Brun, Utilities Director
Prepared By: Kevin Miller, Materials Diversion Administrator
TITLE:
Title
Adjustment to Recyclable Materials Gate Fees for Materials Diversion Facility
LABEL
RECOMMENDED ACTION:
Recommendation
Adopt a resolution establishing recyclable materials gate fees at the City’s Materials Diversion Facility, to become effective May 1, 2024, and July 1, 2024, for Napa County per City Agreement No. 8782.
Body
DISCUSSION:
The Materials Diversion Facility (MDF), which is located south of the City, receives and processes all residential and commercial source separated recyclables and compostable materials generated within the City and collected by the City’s hauler, Napa Recycling & Waste Services (NRWS). The MDF also receives and processes materials delivered by haulers servicing surrounding jurisdictions (such as the County of Napa, Sonoma and American Canyon) and by private (self-haul) customers. Customers are charged a processing fee for use of the facility, which is usually based on the type and quantity of the material delivered.
As owner of the MDF, the City is responsible for determining what materials are accepted at the MDF and for setting the fees that are charged to customers that deliver materials to the MDF for recycling. The City collects and uses the fees to cover facility related costs as well as costs of processing the materials, including costs paid to NRWS under City Agreement No. 8687. The rates charged (or credits if applicable) to third party and contractual users of the MDF are usually referred to as a “gate fee.” The rates need to be competitive with other facilities in order to promote usage of the MDF, and must cover the costs of processing the materials as well as fixed City costs related to purchase and maintenance of MDF, including recent major capital and system improvements to the MDF. The fees must also take into consideration increased (or decreased) revenue from the sales of recyclables materials also known as “materials sales revenue.”
For mixed recyclable materials, commonly known as “single-stream” recyclables, the City established a gate fee in 2020 because the global markets for materials had declined substantially while the processing costs continued to increase. In better market times, the City has paid out a competitive price for recyclable materials in order to attract and secure the flow of these type of recyclable materials and receive the benefit of additional non-collection rate revenue for the Solid Waste and Recycling Enterprise Fund (“SWR Fund”) from the sale of materials.
Unfortunately, the increased market prices for recyclable materials in calendar year (“CY”) 2022 declined substantially in CY2023. Thus, the recommended change in Recyclable Materials Gate Fees is spurred by negative market pricing news for recyclable materials while contractual processing costs paid by the City to NRWS as the facility operator of the City’s MDF continue to increase. This means the City needs to eliminate current “payout” credits and either convert them to charges or increase the current gate fee charges in order to recover operating costs for the services being provided by the City’s MDF to process recyclable materials.
In CY2019, which was the basis of how the 2020 gate fees were set for recyclable materials, the average market value for residential single-stream (mixed) recyclables was $121 per ton while the over-baseline (“OB”) processing costs paid to NRWS was approximately $85 per ton. By CY2021, the average value for residential single-stream recyclables had increased significantly to $139 per ton and the OB processing costs paid to NRWS increased to $89 per ton. For CY2022, the average value for residential single-stream recyclable rose dramatically to $268 per ton while the OB processing costs paid to NRWS also increased to $99 per ton. For the adjustment being proposed in this staff report, CY2023 saw a marked decline in the average value of residential single-stream (mixed) recyclable from $268 per ton in CY2022 to $180 per ton in CY2023. This represents a 33 percent decrease in market value for residential single-stream (mixed) recyclable materials and the drop for commercial single-stream recyclable materials is even more pronounced with a 48 percent decrease from average market value of $211 per ton in CY2022 to $109 per ton in CY2023. This is the most recent data the City has available and the single year decline is the highest the City has seen in nine years. The CY2023 market value reflected very significant and across-the-board decreases in the value of paper fiber (such cardboard, newspaper and mixed paper), as well as metal, glass and plastics. As a result of amendments to City Agreement No. 8687 with NRWS (including the 2022 Contract Amendment and SB 1383 Contract Amendments with NRWS), processing costs have increased. Processing costs are adjusted by contractual inflation indices which was 7.8% increase from CY2021 to CY2022 and then a 2.5% increase from CY2022 to CY2023 for the over-baseline (OB) processing payment. Revenues obtained from the sale of single-stream material are contractually shared between the City (70% share) and NRWS (30% share). This structure is imbedded in the City Agreement No. 8687 and means that both the City and NRWS share in the risks and rewards of ever-changing global markets for recyclables.
The loss of materials sales revenue prompted by the decreased market value for recyclables in general (also factoring in the impact of the increased contractual processing costs owed to NRWS) has prompted staff to recommend that the City either increase charged gate fees or adjust current gate fees “credits” (payments) to become charges for single-stream recyclables brought to the MDF by contractual and third party users of the facility. As shown in the 2024 MDF Recyclable Materials Gate Fee Analysis (attachment 2 to this staff report), the average price for residential single-stream for 2024 (using CY2023 materials sales data) is projected at $180 per ton and $109 per ton for commercial single-stream recyclables (which have a higher percentage of lower value paper fiber such cardboard vs. higher value bottles and cans). The analysis also reflects $4 million in capital improvements to the sorting facility in 2018/2019 and other non-labor processing costs at just under $22 per ton for single-stream other non-City recyclable materials. The recommended gate fees include a 24% market volatility “buffer” to protect City rate payers and help assure that any third-party or contractual users of the MDF will result in a net positive revenue position to the SWR Fund.
As shown in Attachment 1 to this report, staff is recommending the following recyclable materials gate fees effective May 1, 2024, with an exception of an effective date of July 1, 2024, for Napa County (under City Agreement No. 8782):
|
Material |
Current Gate Fees |
Proposed Adjusted Gate Fees Effective 5-1-2024 (Effective 7-1-2024 for Napa County) |
|
Residential Recyclable Materials from Napa County (per City Agreement No. 8782) |
$55 per ton credit |
$25 per ton charge |
|
Commercial Recyclable Materials from Napa County (per City Agreement No. 8782) |
$5 per ton credit |
$70 per ton charge |
|
Source-Separated Commercial Green Glass from Napa County (per City Agreement No. 8782) |
$20 per ton credit |
$20 per ton credit |
|
Source-Separated Commercial Clear Glass from Napa County (per City Agreement No. 8782) |
$20 per ton credit |
$20 per ton credit |
|
Residential Single-Stream (“Mixed”) Recyclable Materials |
$30 per ton credit |
$30 per ton charge |
|
Commercial Single-Stream (“Mixed”) Recyclable Materials * |
$10 per ton charge |
$75 per ton charge |
|
Minimum Charge per load * |
$24 per vehicle (load) |
$24 per vehicle (load) |
* Minimum Charge per load is applicable only to materials listed in the above chart with an “*”
Please note that the memorandum of understanding (MOU) agreement between the City and Napa County (City Agreement No. 8782/County Agreement No. 6430) specifies contractual pricing for Napa County as distinguished from any other user of the City’s MDF. The gate fees recommended for Napa County reflect composition studies conducted specifically on Napa County single-stream materials. These Napa County specific studies show a higher market value ($192 for residential single-stream and $102 for commercial single-stream) and a lower market variability buffer (20%) since the City has more accurate and specific composition data for the County’s stream (as provided in the City’s MOU with Napa County). The City’s MOU with Napa County provides for a 60-day notice before less favorable contractual pricing can be levied by the City to Napa County. If Council approves the proposed Recyclable Materials Gate Fees, the City will send a 60-day notice letter to Napa County and the new contractual gate fees will become effective July 1, 2024. In this circumstance, Napa County has the right to seek other facilities to process their recyclable materials and the City would have the right to match any written pricing from other facilities before Napa County could deliver contractually-defined Recyclable Materials to another processing facility. The City of Napa has always strived to offer fair and market-driven pricing over many years and Napa County has always shown a preference to continue to have its materials processed within Napa County. Staff would expect this to be the case again if the proposed Recyclable Materials Gates Fees are approved by Council and the 60-day notice is provided to Napa County.
The SWR Fund cannot be put in a position to lose money for materials delivered and processed at the City’s MDF. Staff has performed the necessary analysis and concluded that the above gate fee structure is competitive with fees currently being charged by other facilities and would promote the highest and best usage of the facility. The revenue generated by the gate fees and materials sales will fully cover the associated operating costs of the MDF.
FINANCIAL IMPACTS:
The projected revenue benefits and impacts of the proposed gate fee adjustments on the Solid Waste and Recycling (SWR) Enterprise Fund in the current FY are as follows:
Recyclable Materials Gate Fee to Napa County: In CY2023, unincorporated south Napa County delivered approximately 14,000 tons of commercial single-stream and/or other recyclable materials (with 3,700 tons being glass) and 3,000 tons of residential single-stream materials. At the proposed contractual gate rate of $70 per ton charge for commercial Recyclable Materials, MDF Gate Fee revenue will be increased by approximately $700,000 (approximately 10,000 tons X $70/ton) for FY2024/25. At the proposed contractual gate rate of $25 per ton charge for residential single-stream recyclables, the projected MDF gate fee revenue will be increased by approximately $225,000 (approximately 3,000 tons X $25/ton) for FY 2024/25.
Recyclable Materials Gate Fee for other 3rd party MDF users: In CY2021, all other 3rd party users (not including Napa County) delivered a little more than 16,000 tons of single-stream recyclable materials to the MDF. For the remaining two months of current City Fiscal year (FY) 2023/24, this translates to 2,600 tons of third-party recyclables delivered to the City’s MDF. The vast majority of the single-stream recyclables are residential single-stream materials, so at the proposed $30 per ton charge, the projected gate fee revenue for FY 2023/24 would be increased by $78,000 (2,600 tons X $30/ton) and by $480,000 for FY2024/25 (16,000 tons X $30/ton).
Elimination of Payments for Recyclable Materials: The proposed adjustments to Recyclable Materials Gate Fees would eliminate all current payments (credits) for Recyclable Materials with the exception of payments (credits) for commercial green and clear glass to Napa County (where markets have remained stable and no adjustment is being recommended by staff at this time. Avoided payments to non-County users of the City MDF would save approximately $78,000 for remainder of FY2023/24 (2,600 tons X $30/ton credit) and approximately $480,000 for FY2024/25 (16,000 tons X $30/ton). Because of the 60-day notice requirement to Napa County for adjustments to MOU contractual pricing, there would be no expenditure savings in the current City FY2023/24 but there would be $165,000 in lower expenditures compared to current residential County single-stream (mixed) payments in FY2024/25 (3,000 tons X $55/ton credits). As noted previously, this would be part of a mid-cycle budget adjustment for FY2024/25 if proposed Recyclable Materials Gate Fees are adopted by Council.
Overall Benefits and Impacts: The proposed Recyclable Materials MDF gate fees represent an estimated increase of $78,000 in MDF gate fee revenue for the last two months of FY2023/24 and $1,405,000 in additional MDF Gate Fees for FY2024/25 ($480,000 for non-County users of MDF, $700,000 for Napa County commercial and $225,000 for Napa County residential materials). The proposed Recyclable Materials MDF gate fees would lower expenditures for non-County users of the MDF by estimated $78,000 for the last two months of FY2023/24 and $480,000 for FY2024/25 (16,000 tons X $30/ton) and $165,000 in lower expenditures compared to current residential County single-stream (mixed) payments in FY2024/25 (3,000 tons X $55/ton credits).
However, the above impacts offset lower expected materials sales revenue (from lower market prices) and higher overall contractual processing costs paid by the City to NRWS as the operator of the MDF. The proposed gate fees adjustments would be used to offset capital and operating expenditures associated with the processing of specified recyclable materials delivered to the MDF. A more detailed “2024 MDF Recyclable Materials Gate Fee Analysis” spreadsheet is the second attachment to this staff report.
The above estimates assume no reduction in contractual or third party MDF tonnage volumes as a result of the new recyclable materials gate fees. Staff feels this is a reasonable assumption since we are taking these steps to reflect in the decreased market value of recyclables (which MDF users are aware of) and increased facility processing costs which are both universal impacts for the industry.
As noted above, staff is not recommending a budget adjustment to the MDF Gate Fee revenue at this time since the net impact is minimal for the current FY 2024/25 SWR Fund. However, the impact for FY2024/25 is significant and will be factored into the mid-cycle budget adjustment process if the proposed Recyclable Materials Gate Fees are adopted by Council.
CEQA:
The Utilities Director has determined that the Recommended Action described in this Agenda Report is not subject to the California Environmental Quality Act pursuant to California Public Resources Code Section 21080(b)(8).
DOCUMENTS ATTACHED:
ATCH 1 - Resolution
EX A - MDF Recyclable Materials Gate Fees Effective 5/1/2024 and 7/1/2024 for Napa County
EX B - Executive Summary of Analysis and Basis for Proposed Recyclable Materials Gate Fees
ATCH 2 - 2024 MDF Recyclable Materials Gate Fee Analysis
NOTIFICATION:
A legal notice of the public hearing was published in the Napa Valley Register on Saturday, April 6, 2024. If new gate fees for recyclable materials are approved by Council, a 60-day notice letter will be sent to Napa County (per MOU agreement) and other third-party users of the MDF will be sent advance electronic notices.
Courtesy Copy (via email) to:
Greg Kelley, General Manager/Managing Partner, Napa Recycling & Waste Services
Mike Murray, Chief Financial Officer, Napa Recycling & Waste Services
Steve Lederer, Public Works Director, County of Napa
Dave Briggs, Resource Conservation Specialist, County of Napa