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Diversion: Sense and Cents

On September 12, 2002, the Alberta Beverage Contain- er Management Board (BCMB) failed to reach a unanimous decision to set beer-container handling fees for Alberta depots. Subsequently, the board ini...


On September 12, 2002, the Alberta Beverage Contain- er Management Board (BCMB) failed to reach a unanimous decision to set beer-container handling fees for Alberta depots. Subsequently, the board initiated arbitration, which immediately triggered two simultaneous requests for judicial review by the Alberta Bottle Depot Association (ABDA) and the Western Brewers Association (WBA).

The ABDA contends that the Alberta BCMB’s decision to arbitrate amounts to an improper delegation of its regulatory authority to a third party. Its position is that a majority vote by the board should be enough to put the matter to rest. Conversely, the WBA contends that the board does not have (and arbitrators tasked to preside over such an arbitration would not have) enough cost information to determine what constitutes reasonable handling fees. The WBA contends that in failing to collect such information the Alberta BCMB has not met the requirements of its own bylaws.

A new “regulated industry” approach is expected to result in a more reasonable, fair and transparent process for setting bottle depot handling fees.

Background

The Alberta BCMB’s bylaws are unique among Canadian bottle deposit jurisdictions in that they explicitly stipulate that handling fees should balance the need for a “fair return” to depots with the need for the lowest possible cost to consumers. Moreover, the same bylaws also give the board authority to collect whatever “sound information” it requires from bottle depots to ensure this balance.

Ironically, on the same day that the Alberta BCMB failed to reach a decision on beer-container handling fees it voted to launch an extremely progressive program to collect detailed cost and capital data from the 215 bottle depots as a provision to re-license. Whatever the outcome of the ongoing litigation, this initiative offers the opportunity to set a new course for the Alberta BCMB and establish a Canadian precedent for the setting of reasonable, credible and defensible bottle depot handling fees.

Using a data collection template or “Uniform Code of Accounts,” it collects depot-by-depot data on wage rates, employment hours, taxes, leases, utility expenses, equipment capital costs and rentals, vehicle costs and a host of other depot-related expenses.

A necessary precursor to a “regulated industry” or “utility” approach to setting fees for the collection of credible, defensible and audited cost data would result in reasonable handling fees and also offer opportunities to increase depot efficiency and to assess the benefits of applying volume-based tiered handling fees.

Regulated industry approach

So how would a “regulated industry” or “utility” approach for setting handling fees work? Essentially, the total cost to operate Alberta bottle depots is the sum of the average annual operating costs of depots (including a depreciation allowance on capital) plus a “fair return” on assets. Handling fees are then set simply by portioning this total cost to different classes of containers (e.g. aluminum beer cans vs. plastic pop bottles) based on the relative effort required to redeem them (which is referred to as activity-based costing).

The collection of operating cost data such as on wage rates, employment hours, taxes, leases, utility expenses, etc. is rather straightforward. An assessment of assets on which to set a fair return is only marginally more difficult and will require Alberta depots to report the capital costs expended to start up and operate their bottle depot. In addition, information on depreciation of those assets and the amount of working capital (e.g., the amount required to pay bills in the time between incurring a cash outlay and receipt of a cash income) is also critical information.

(As an aside, if there is any weakness in the current format of the board’s Uniform Code of Accounts it’s in the requirement to provide details regarding capital and depreciation.)

Now, let’s address the slightly more complex issue of a “fair return” (something which the Alberta BCMB has yet to address). A fair return is really nothing more than a percentage return (or return rate) on the depreciated capital base and working capital. But what return rate to use? Most regulators of other regulated industries (e.g., natural gas pipelines, electric utilities, private water utilities, etc.) would say they do not calculate a rate of return in any precise mathematical way. Rather, it is a number that to some extent is a subjective judgment call by the regulator as to what is “fair.”

Prior to making this judgment, regulators will often consider the earnings of similar businesses facing the same type of risk. They will consider the potential dividends and capital gains that depots may realize relative to the investment made in the depot and risk premiums that provide depot operators with a return that is greater than what might be achieved if they simply bought government bonds.

While a “regulated industry” or “utility” approach for setting handling fees might be new to the bottle depot business, it’s an approach that Canadian jurisdictions have been developing through a century of trial and error, court appeals, and through public policy debate in legislatures. This process should result in a set of handling fees that are less likely to be source of conflict between bottle depots as regulated service providers and brand-owners.

Usman Valiante is principal of General Science Works, based in Toronto, Ontario. E-mail Usman at valiante@ican.net


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