Landfill Manager’s Notebook: Tipping Fees—A Look at Differential Rates

Tipping fees are the fuel that drives your landfill’s financial engine, and setting the correct gate rate would appear to be economics 101: You must charge enough to cover your capital and operating costs, fund closure and post-closure, and have enough money left over for a reasonable profit and reserve.

If this sounds like a simple process, I’d suggest perhaps that you have not actually done it. On the other hand, if you know the frustration of working hours on a puzzle, only to find that the last piece is missing… perhaps you have.

Financial experts follow certain procedures, known as Generally Accepted Accounting Principles (GAAP). But when you try to apply those principles to landfill rate-setting, you’re likely to find a gap in your GAAP. Some puzzle pieces may be missing.

Hourly equipment cost is a prime example. In the process of conducting CORE Assessments (CORE is an acronym for comprehensive operations review), we always ask about the hourly cost of machines. Often, we’ll get a list of machines with unrealistically low hourly costs—say $23 per hour for a D8 dozer… seriously? When we drill down, we find that these hourly costs account only for fuel consumption… because the machine is paid for… and fleet services handles all the services and repairs (for a flat rate).

This is misleading because the true (all-in) cost of operating a D8 dozer is five to seven times higher when we account for the cost of purchase, financing, repairs, maintenance, downtime, and a machine replacement fund.

Bottom line: Managers can’t make accurate financial decisions when they don’t have accurate numbers to start with.

Once you have a good grasp on your operating costs, you can begin looking at another vital financial number: Airspace. Airspace represents your landfill’s biggest—and perhaps only—resource. Surprisingly, for many cities and counties, landfill airspace may be one of your organization’s biggest resources… period.

Consider a regional county landfill with 6.6 million cubic yards of capacity and a gate rate of $50 per ton. If we assume an effective density of 0.80 tons per cubic yard, the landfill could receive 5.28 million tons of waste. At $50 per ton, that resource (the landfill’s airspace) could generate nearly $264 million in total revenue. Now that’s a resource!

But look closer at how sensitive that resource value is to your landfill’s tipping fee. Every dollar up or down on the tipping fee changes your total revenue by $5.28 million. Want to generate another million bucks? Raise your tipping fee by 19 cents per ton!

Similarly, your landfill’s effective density (here assumed to be 0.80 tons per cubic yard) is a big factor. Through a recent CORE Assessment, we helped a municipal landfill increase their effective density from 0.55 tons per cubic yard to 0.80—resulting in a $50 million increase in total site revenue. And they reduced their ongoing operating costs by $2 million per year in the process.

The rate of airspace consumption can be impacted by your technique of compacting and covering, but also by the type of waste you receive. For example, hydrocarbon-contaminated soil is very dense, and even with minimal compaction effort, you’ll be achieving effective densities in the range of 1.4 tons per cubic yard.

Compare that to mattresses, where the effective density will be approximately 0.12 tons per cubic yard… or something around 240 pounds per cubic yard.

As a point of comparison, with a gate rate of $50/ton, the soil would generate a revenue of approximately $70 per cubic yard of airspace consumed, while mattresses would produce around $6 per cubic yard.

So, let’s standardize these two rates so that both materials generate the same revenue (per cubic yard) as traditional waste compacted to an effective density of 0.8 tons per cubic yard: (0.80 tons)/(1 cubic yard) × $50/(1 ton) = $40/(1 cubic yard)

Our baseline is $40 (revenue) per every cubic yard of landfill airspace consumed. This means that we could charge $28.60 per ton for soil, and you’d end up making your $40/cubic yard.

But it also means that you’d have to charge approximately $330 per ton for mattresses in order to make that same $40/cubic yard. This may be shocking—the thought of charging $330 per ton for mattresses. But then again, maybe not—especially when you consider that every single mattress is costing you money.

Yep, that’s right. The actual cost of producing your airspace—considering land, liner and engineering, could be in the range of $10 per cubic yard. This can vary widely, but $10 is a reasonable estimate. So, even though you might not realize it at the point of transaction, every time a customer brings in a mattress (at $50/ton), you are essentially paying them $4… for the privilege of landfilling it!

Keep in mind that this is an example, and every landfill is different. But we aren’t far off the mark.

We haven’t even addressed the potential damage that certain types of waste can do to your machines. Since we’re talking about mattresses, ask your operators how they like pushing, compacting, and covering them. Brace yourself; they might say a bad word.

The wire and coil springs in mattresses wreak havoc with machines by wrapping around drive shafts, axles, and undercarriage components. And when placing cover soil, snagging even the slightest corner of a mattress can ruin the slope… and your operator’s day.

C&D, wire, pipes, lumber, stumps, cable, rope, and other bulky items all have the potential to damage machines… and so should be assigned an additional fee for what is commonly referred to as “Hard to Handle.”

So, here we are, at the brink of optimizing our gate rates to make sure that every load of waste pays its fair share—but there’s just one more bridge to cross: You must convince the administrative and political decision-makers.

If you thought calculating differential rates based on the actual characteristics of various waste types was tough, you may not be ready to run with the big dogs. Perhaps you should get back on the porch.

Creating a rate schedule based on fair pricing is not something that all landfill customers will appreciate, let alone understand. Thus, when you propose a rate of $330 per ton for mattresses, you can expect some pushback from mattress store owners, hotel managers, and others who will directly feel the pinch. They will contact their elected representative to voice their displeasure and—votes being what they are—they will get a response… and your phone will ring.

At this point, facts are your best friend. If you can show why a series of differential rate changes make sense… if you can point to lots of money saved and many years of additional landfill life gained… if you can show that you know your stuff… you will have a good chance of success. In my experience, those who make decisions on the administrative and political level want to make the best decision. Yet they often do not have time to become expert in every topic, including landfill rate-setting. So your job is to provide solid information in a clear and straightforward manner.

Knowing your stuff is only part of the solution. The other part is communicating it to others so change can take place.

And sometimes the way you present a rate change can have a big impact, too. Increasing the tipping fee on mattresses to $330 per ton sounds astronomical, but a “surcharge” of $13 per mattress sounds… well, a lot better. By the way, mattresses run, on average, about 25 to the ton, so a mattress rate of $330 per ton actually works out to approximately $13 per mattress. Either way, you’ll get your money.

Administrative and political folks are—by the very demands of their job—quick to understand and generally willing to make hard decisions… if they just know what and why. As the landfill manager—it’s your job to provide those answers.