Economies of Scale: City Weighs Options for Recycling Center

By Phil Wayne
Staff Writer

Second of two parts

June 27 -- The City Council next month may lay the groundwork for the future of recycling in Santa Monica, as it begins weighing what to do with a prime asset -- the Santa Monica Recycling Center.

The center has been run for the last 12 years by the Allan Company which, under its contract with the City, also weighs, processes and pays for all curbside blue bin recyclables.

While the City maintains trust and confidence in Allan and exercises little oversight of recycling operations, an investigation by The Lookout found that the company has used scales that were temporarily under-weighing in 2005. (see story)

Workers sort recyclables on aging equipment. (Photos by Phil Wayne)

As the council reviews recommendations for the entire City Yard, it will consider various options for the recycling center, which include renewing the contract with Allan under terms more favorable to the City, contracting with a different company or running the site itself.

Allan is anxious to keep the contract. The company currently pays a low lease rate for the site, retains all profits from the buy-back and drop-off areas, receives little scrutiny from the City and sorts an exceptionally clean stream of recyclables.

“We’re willing to do just about anything the City asks us to do,” said Adam Holt, who manages the center for Allan. “We really want to be here. We really want to be a part of the future -- whatever that may be.”

While officials appear to be lukewarm to the idea of having the City run the center, “that’s an option,” said Celeste Peele, the City’s solid waste operations manager.

Taking over the center, which is in Santa Monica’s own back yard, would allow the City to benefit from all profits -- as well as attractive State CRV monies -- generated at the buy-back center, the drop-off area and from curbside recyclables.

It would also allow the City to exercise full oversight over operations and tonnages.

While Allan estimated that the value of curbside recyclables ranged from $120 to $145 per ton in 2004, the City received a flat rate of $10 a ton until December of that year, when Allan offered to increase the rate to the current $25.

The City already handles all collection of blue bin materials, using its own trucks, labor force and fuel to drop off City recyclables at the Allan site.

Still, having the City run the center is “not one of the options that was being strongly considered (by City officials),” said Frank Bernheisel, vice president of GBB Consulting, the company performing an ongoing solid waste study for the City. “But it’s certainly possible,” he added.

Aside from lease payments, under the existing contract, Allan pays the City only for curbside recyclables and materials brought over from the City’s transfer station, where trash is sorted prior to being trucked to landfills.

The City shares none of the profit generated by items the public brings in to the recycling center, either in the “buy-back” areas or the drop-off bins in front. The company refers to the drop-off bins as the “donation” area, since the public receives no money for materials deposited there.

Drop-off bins.

Allan took in more than 12.5 million pounds of materials in its buy-back program and another 1.2 million pounds in the drop-off bins in 2005, according to company figures.

Buy-back operations involve weighing bottles and cans customers turn in for California Refund Value (CRV), as well as bulk loads of scrap materials, such as aluminum or copper tubing, which Allan buys and then sells to manufacturers.

For a private company, the advantages of running a recycling center for the City of Santa Monica are considerable, and the current contract appears to be quite lucrative.

As the official recycling center for Santa Monica, it draws its business from “a very environmentally sophisticated populace,” according to Holt, the center’s manager.

This means materials brought in to the center by the public are generally cleaner and better separated -- meaning less work for the contractor.

Even the blue-bin stream of recyclables is remarkably clean, according to Holt. “As curbside goes, this is the cream of the crop,” he said. “It really is.”

“Managers of other yards come in here…and say, ‘Don’t tell me that’s your curbside! You gotta be kidding!’” Holt added, referring to the relative purity of the materials.

Furthermore, the center is a powerful magnet for customers from outlying communities who place their recyclable materials in the drop-off bins.

They are a motivated group, according to Holt. “It’s crazy. I mean… I’ve come in here (to the center) at 1 in the morning … and there are people out there donating stuff in the middle of the night,” he said.

Allan also locked in a rock-bottom lease rate for the site, currently paying $4,072 a month for some 45,000 square feet, or about nine cents per square foot.

In February 2004, as the recycling center contract neared its termination date, the company offered to pay the City 50 percent more to lease the site.

The increased rate was “based on property value” according to a confidential letter the Allan Company wrote to Craig Perkins, the City’s director of environmental and public works management.

The City, however, must entertain competing bids before accepting any offers, said Gus Guzzetti, who is in charge of the transfer facility and the recycling contract with Allan.

In the meantime, Allan -- which has expressed a strong desire to renew the contract -- has continued at the low rate on a month-to-month basis since the initial, ten-year term ended in May 2004.

In addition to the proposed 50 percent rent hike, Allan offered to pay as much as $1.5 million to modernize the facility, if its contract is renewed for seven years with a five- year option.

City officials have said that the obsolete equipment Allan currently operates at the site limits how much the company can pay the City for its recyclables. The latest technology is needed to separate materials more quickly, lower costs and increase revenues, they said.

The City would have to bear the cost of renovation were it to run the center itself.

View of recycling center from street.

But there other reasons why the City has expressed only scant interest in taking over the site.

Both Guzzetti and Perkins cite labor and insurance costs, commodities market fluctuations, training, and procurement and maintenance of equipment as major obstacles.

“There are a lot of factors that need to go into that calculation,” Perkins said.

Bernheisel said GBB had looked into Allan’s performance at the site and found the company “is recycling the material and doing a good job.”

“There are other companies that are equally qualified in the area,” he noted. “We have no favorites.” Bernheisel said the decision should be based on the bids received for the contract.

The City anticipates putting out requests for proposals from prospective contractors sometime after a council working session with GBB, currently scheduled for July 11, Bernheisel said.

One of the advantages that Allan has, according to Perkins, is that the company is “a pretty big operation,” enabling it to command better prices for recyclable materials.

“They have economies of scale,” Perkins noted.