December 10, OAL Reference Attorney 300 Capitol Mall, Suite 1250, Sacramento, CA By

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1 December 10, Keystone Ave. Culver City, CA Telephone (310) Fax (310) OAL Reference Attorney 300 Capitol Mall, Suite 1250, Sacramento, CA By Sharon Siozon Processing Payment Emergency Regulations Department of Resources Recycling and Recovery, Division of Recycling (Cal Recycle ) 801 K Street, MS 19-01, Sacramento, CA By bevcontainerregs@calrecycle.ca.gov, Sharon.Siozon@CalRecycle.ca.gov CC: Scott Smithline, Director, CalRecycle Scott.Smithline@CalRecycle.ca.gov Adam Tauber, Deputy Director, Division of Recycling Adam.Tauber@CalRecycle.ca.gov Dear OAL Reference Attorney and Ms. Siozon, The Container Recycling Institute supports the adoption of emergency regulations changing the reasonable financial return (RFR) applied to the calculation of processing payments for the period of January 1, 2019 to December 31, As you know, the proposed emergency regulations will amend the California Code of Regulations (CCR), commencing with Section 2975, Subchapter 12, Chapter 5, Division 2 of Title 14. We commend you for taking this much needed step to address the California redemption center crisis by extending the existing emergency regulations. CRI applauds your leadership and initiative on this issue. While we respect the sentiment of the "Finding of Emergency," the proposed amount of the RFR, at 11% and 16% for rural sites, is nowhere near enough to avert the impending financial crisis for redemption centers. Nearly all financial conditions and indicators are negative: Current payments are already inadequate, and on average, five centers closed each month in 2018, remaining a crisis, especially since nearly 1,000 centers closed in the last 5 years (39% of pre-crisis total). Minimum wage is scheduled to increase by 9% in two weeks, a significant cost increase. Handling fees were recently cut by 19%, which is a significant revenue decrease for the 700 handling fee sites. There is no "reasonable financial return" applied to handling fees -- they are simply made to cover costs, with zero profit margin. Processing payments are projected to decrease for 2019, but by an unknown amount. (This will be a revenue decrease.) Scrap price declines: Industry experts are projecting a continuing decline in PET prices, with PET being more than 50% of containers redeemed. (This will be a revenue decrease.) Changing container market affects scrap revenue: aluminum, the highest value container per ton, continues to decline as a percentage of all containers redeemed (revenue decrease.) Major scrap price decline is on the horizon: A major aluminum can sheet factory is scheduled to close in 2019, and new capacity will not come on line for another 6-12 months. It is widely anticipated that aluminum UBC prices will decrease by cents per pound, and that sales will be delayed, leaving redemption centers or processors possibly having to store materials before they can be sold. This one

2 event alone is likely to cause the greatest financial hardship to redemption centers in California, since they bear the full effects of commodity price declines (revenue decrease.) All of these things together call for an increase in the RFR of well above what is proposed in the draft emergency regulations -- it should be at least twice as high, and CalRecycle should endeavor to study these cost and revenue impacts more closely to find new ways to stem the closure of redemption centers. Necessity for Extending the Emergency Regulations CRI has calculated that from July 2013 to December 2017, redemption centers in California were collectively underpaid $64 million in processing payment shortfalls. As a result, more than 1,000 redemption centers closed in California, leaving only 1,570 redemption centers in the state, and leaving several counties without any redemption centers at all. At least 10 counties in the state have lost more than 50% of their redemption centers since Figure 1. Statewide Average Monthly Scrap Values Reported by CalRecycle, July 2012 Sept Per Ton Scrap Value $500 $450 $400 $350 $300 $250 $200 $150 $100 $50 $- PET Plas1c Jul-2012 Jan-2013 Jul-2013 Jan-2014 Jul-2014 Jan-2015 Jul-2015 Jan-2016 Jul-2016 Jan-2017 Jul-2017 Jan-2018 Jul-2018 Per Ton Scrap Value $8.00 $6.00 $4.00 $2.00 $- -$2.00 -$4.00 -$6.00 Mixed Glass Jul-2012 Jan-2013 Jul-2013 Jan-2014 Jul-2014 Jan-2015 Jul-2015 Jan-2016 Jul-2016 Jan-2017 Jul-2017 Jan-2018 Jul-2018 Per Ton Scrap Value $2,000 $1,800 $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $- Aluminum Cans Jul-2012 Jan-2013 Jul-2013 Jan-2014 Jul-2014 Jan-2015 Jul-2015 Jan-2016 Jul-2016 Jan-2017 Jul-2017 Jan-2018 Jul-2018 Source: CalRecycle, Container Recycling Institute, Dec An extension of the emergency regulations to increase the RFR is greatly needed to soften the blow of scrap values that continue to decline, as shown in Figure 1 below and in Tables 2 and 3 (appended to this letter). Since 2012, scrap values for PET plastic and mixed glass have steadily declined, with the scrap value of mixed glass reaching a negative value. Declining scrap prices decrease the revenue obtained by redemption centers, who are heavily dependent on these commodity prices. Extending the emergency regulations will help redemption centers offset these falling prices, but it will not be enough to regain financial profitability. Another reason why these emergency measures must be enacted is that there is an overall decline in the percentage of aluminum in the beverage container marketplace. Based on the statistics provided by CalRecycle in the annual Fact Sheets, the percentage of aluminum redeemed has decreased from 47.1% of total containers redeemed in 2012 to 38% in This decline has eroded redemption center profitability, especially since aluminum has consistently been the most profitable commodity (on a per ton basis) for redemption centers due to its higher scrap value compared to PET plastic and glass. The proposed emergency regulation will help mitigate the effect that this decline has on redemption centers across the state. 2

3 However, for reasons that we will demonstrate below, the amount of the proposed reasonable financial return (RFR) is not enough. Minimum Wage Increase Not Reflected in 2018 or 2019 RFR The cost survey was based on financial records from 2016, whereas the RFR extension now proposed is meant to compensate the redemption centers for their projected costs in We know that the minimum wage increases from 2016 to 2019 will be 10% and 20% for small and large employers, respectively, as Table 1 shows. CalRecycle s finding of emergency (page 9), however, does not include the 2019 wage increase. We believe the extension of the RFR should take the 2019 minimum wage costs increase into account. Table 1. Minimum wage in California, * Year 26 Employees 25 Employees 2016 $10.00 $ $10.50 $ $11.00 $ $12.00 $11.00 Percentage change from 2016 to % 10% *2016: History of California Minimum Wage, State of California Department of Industrial Relations, : Schedule for California Minimum Wage rate , State of California Department of Industrial Relations, Container Recycling Institute, 2018 Declining Costs and Declining Redemption Centers: a Death Spiral CalRecycle uses its biennial cost survey of existing redemption centers to calculate both processing payments and handling fees. The result of the survey the cost of recycling is a weighted average of redemption centers surveyed across the state. The problem with this method is that it cannot by design adequately compensate redemption centers whose costs are higher than the statewide weighted average. This can be seen in the 2017 Processing and Handling Fee Survey, Exhibit 3-18: Distribution of Cost per Container, Handling Fee Recyclers Sample (2016). The statewide weighted average of the cost to recycle is shown as cents per container. Of the estimated 109 redemption centers surveyed (based on a visual of this bar graph), about 59 of them (or 54%) have costs that exceed 2 cents per container to recycle. meaning they will all be paid less than their costs, under the current payment formula. Each year, a number of these higher-cost redemption centers will be driven out of business, and in the following year s survey, those higher-cost locations will not be included in calculating the statewide weighted average cost to recycle, and the average itself will be lower than it was the previous year. In turn, processing payments and handling fees will go down, driving more higher-cost locations out of business, and so on: creating a death spiral of failing redemption centers. While it is laudable that the rate of redemption center closures has gone from 18 per month in to only 5 per month in 2018, five RC closures per month does not represent a recycling success by any measure. It is like a trickle of blood rather than an outright hemorrhage. Five closures per month translates to 60 per year: representing job losses for hundreds of employees, lost income for their families, and lost access to redemption and recycling for untold numbers of consumers, denying them millions of dollars in refunds. Handling Fee Report -- Ominous Potential for More RC Closures Exhibits 3-21 and 3-22 of the Handling Fee Cost Survey report show that smaller-volume sites are particularly vulnerable to bankruptcy due to the new handling fees and processing payments. In both graphs, the smaller-volume sites are operating at a cost higher than average, and the smaller-volume sites are the majority of sites. If even half of the small-volume sites are forced to close due to getting paid based on "average" costs, when their actual costs are above average, then 208 of the 706 handling fee sites would close, or 29%. If half of the small-volume processing fee sites closed, due to being paid based on 3

4 "average"costs, when their actual costs are above average, then 261 of the 778 processing fee sites would close, or 34%. This is before considering increases in minimum wage and the impending crash of aluminum prices. Handling Fee and Processing Payment Calculations are Imprecise Note that the survey process itself isn t an exact science. The survey calculates average costs, but has an error rate of 5-7%, meaning there s about a 50% chance that actual average costs are up to 7% higher than shown. This fact alone is sufficient justification for adding 5-7 percentage points to the reasonable financial return calculation. (See page 6 of Handling Fee report.) How Workers are Bearing the Brunt of the Handling Fee Decrease From the "2017 Processing Fee and Handling Fee Cost Surveys, Handling Fee Final Report, June 2018, exhibits 3-15 and 3-16 illustrate the drastic effects on workers from the last few years' of underpayments to redemption centers, especially to the workers at the handling fee sites. Exhibit 3-15 shows that workers are spending more labor hours per 1,000 containers returned, but Exhibit 3-16 shows that workers at handling fee sites have received an average pay cut of $2.69 per hour from 2014 to Quoting page 50 of the report, "For handling fee sites, the average wage per hour decreased by $2.69, to a level lower than 2012." The $2.69 per hour decrease is an 18% pay cut to workers, taking them to below poverty-level wages. Now that the average worker wage in 2016 was $12.06, and the state's minimum wage will be $12.00 per hour beginning in January 2019, there will be no option to cut worker wages further -- average worker wages at handling fee sites are already the lowest allowable by law. The handling fee was cut from $ /container in 2017 to $ /container in 2018, a 19% decrease in handling fee payments to handling fee sites. At the same time, the minimum wage will increase by 10% in January of The reduced payments to redemption centers will collide with increased costs to redemption centers, and will cause more centers to cut costs in some way, whether by reducing staff, reducing staff hours, or closing altogether. While the handling fee report repeatedly characterizes such reductions in costs in positive terms, as increased productivity, the detrimental effects to consumers continue, as consumers have fewer sites and/or more distant return points, or no reasonable way to get their refunds at all, in which case, the program equates to a tax. Plenty of Fund Balance to Pay Redemption Centers More to Avoid Further Closures CalRecycle has a combined fund balance of more than $350 million in the five funds that are part of the beverage container recycling program. Meanwhile, a doubling of the RFR from 11%/16% to 22%/32% would only cost $15 million in 2019, which is a mere 4.3% of the combined fund balance. As Glass Shifts to Curbside Programs, It Costs the Fund More Furthermore, it is partially a myth that the beverage container fund saves money when redemption centers close. We have seen that the closures force much more glass into curbside programs, and curbside programs have a higher cost structure for glass. As a result, the average cost of glass recycling has increased, which costs the fund more money. In 2017, we calculated that this shift in glass to curbside programs is costing the beverage container fund $9 million per year, all while producing smaller quantities of glass and lower-quality glass. 4

5 Reasonable Financial Return (RFR) We agree with CalRecycle that the reasonable financial return that was calculated for 2017 was unfortunate and unfair to recyclers, as the calculation forced them to lose nearly 6% on every ton of glass and plastic that they handled. It is clear that this was a consequence that was never foreseen or intended by the legislature, indeed, the legislation has a purpose to create and maintain a marketplace where it is profitable to establish sufficient recycling centers and locations to provide consumers with convenient recycling opportunities through the establishment of minimum refund values and processing fees and, through the proper application of these elements, to enhance the profitability of recycling centers, recycling locations, and other beverage container recycling programs. In the longer term, CalRecycle may want to revisit the use of the exact index that is used for the RFR (reasonable financial return), as the current index is inappropriate for redemption centers. The business of running a regulated redemption center is fundamentally a different business model than the operation of businesses that fit within SIC code SIC code 5093 is for wholesale distribution of scrap materials, a business type that has much more flexibility in choosing to purchase or not purchase materials and to set the prices for both purchase prices and sales prices; these commodities businesses make money on the small margin (or markup) between the purchase price and sales price of materials. In contrast, California redemption centers have very little flexibility in how they operate, no flexibility in choosing the containers they accept from the public, and are subject to undue risk from the volatility of scrap prices for beverage containers. Costs to Fund One of the goals in CalRecycle s Finding of Emergency is to balance impacts and costs to the fund. The proposed RFR may not actually impact the fund significantly because it is offsetting other decreases in the processing payment calculation for 2018 which has not yet been published, but is widely expected to decrease. Therefore, with the increase in the RFR, the net effect may be positive or negative in terms of cost, but we don t have enough information to understand the combination of effects, many of which cancel each other out. There is No Need to Increase Processing Fees in Conjunction with These Proposed Emergency Regulations In 2016/17, CalRecycle began a three-year process of transferring more than $7 million each year to the glass processing fee fund, and more than $3 million per year to the plastic processing fee fund. At the end of three years, more than $22 million will have been shifted into the glass fund, with no accompanying expenditures. The full $22 million will increase the fund balance in that fund, with no need to spend the money. According to the June 2017 Quarterly report, there was a 20% reserve in the Glass fund as of 6/30/17 ($12.9 million versus $63 million in annual expenditures). 5

6 Similarly, the three-year process of transferring funds to the plastic account will result in an extra $9.8 million in that account, also with no need to expend those funds. The full $10 million (rounded) will increase the fund balance in that fund. According to the June 2017 Quarterly report, there was a 32% reserve in the Plastic fund as of 6/30/17 ($15.1 million versus $47.5 million in expenditures). Therefore, there is no need to increase the processing fees to manufacturers in order to increase the processing payments that are paid to recyclers, because more than sufficient funds are available from the current and pending transfers. Rural Counties The rural counties have been hit very hard by the redemption center crisis. Furthermore, of the counties that have lost the highest percentage of redemption centers, half of the top ten are predominantly rural, and they have all lost more than 50% of their infrastructure since It is very much justified to have a higher RFR for the rural counties because they have higher transportation costs due to having to travel farther to market and generally have lower volumes and therefore lower economies of scale. In addition, offering extra support for rural recycling centers won t cost the state very much because they only handle 6% of the volume. This fact makes it even more appropriate to give extra support to the people who have the least services and further to drive to reach an operating redemption center. However, the 5% RFR difference (16% vs. 11%) is a very small amount of additional compensation. CalRecycle s Finding of Emergency indicates on page 7 that rural recyclers have an operating cost per ton for PET that is 74% higher than urban recyclers ($715/ton vs. $410/ton). In that case, the extra 5% payments will hardly make a dent in the rural recyclers increased costs. 6

7 Summary To conclude, more than 1,000 redemption centers in the State of California have closed since 2013, and the rural centers have been among the hardest hit. As we show in our attachment, urban areas, especially the San Francisco Bay area, have also lost a large number and percentage of redemption centers. In 2018, the redemption centers have continued to close at a rate of 5 redemption centers per month. The redemption centers have collectively been underpaid $62 million since 2013, and all signs point to increased costs in 2019 coupled with reduced compensation as a result of unfortunate handling fee and processing payment calculations. Together, these will be devastating to California s redemption centers and their workers and California consumers. A much higher RFR than proposed would give redemption centers the best chance to get back on their feet again and for the situation to stabilize, creating more fair opportunities for consumers to get their well-deserved refunds. At the same time, doubling the proposed RFR would only cost the recycling fund about 4% of its fund balance. (Note also that the fund was net positive by $20 million this year, and is anticipated to be positive in the next few years as well: CalRecycle predicts a $92 million net profit next year.) CalRecycle s efforts to prevent additional center closures will hopefully preserve the access to redemption opportunities that California consumers deserve. We urge CalRecycle to continue to monitor the areas with the least access to redemption opportunities, and to draft a strategy for improving access in the redemption deserts in the state. I can be reached by at scollins@container-recycling.org or at Thank you in advance for your consideration. Respectfully Yours, Susan V. Collins President Container Recycling Institute See next page for Tables 2 and 3. 7

8 Table 2. CalRecycle Published Scrap Values, Sept Sept. 2018* ($/ton) Monthly averages Aluminum PET Glass Sep-2017 $1,463 $229 ($0.89) Oct-2017 $1,466 $214 ($2.18) Nov-2017 $1,438 $197 ($3.80) Dec-2017 $1,406 $184 $3.00 Jan-2018 $1,512 $174 $6.51 Feb-2018 $1,514 $175 ($3.60) Mar-2018 $1,512 $182 ($4.26) Apr-2018 $1,635 $206 ($3.08) May-2018 $1,688 $216 ($2.32) Jun-2018 $1,705 $227 ($1.81) Jul-2018 $1,553 $233 ($1.23) Aug-2018 $1,469 $231 ($2.06) Sep-2018 $1,323 $210 ($2.10) Oct-2018 n/a n/a n/a Nov-2018 n/a n/a n/a Dec-2018 n/a n/a n/a * Statewide weighted average scrap values for each beverage container material type are the monthly scrap value purchases reported by participating certified processors. "Statewide Average Monthly Scrap Value Notice." Updated monthly by CalRecycle, Container Recycling Institute, 2018 Table 3. RecyclingMarkets.Net Scrap Values Sept Sept. 2018* ($/ton, Los Angeles/Southwest U.S.A) Monthly averages Aluminum (a) PET Plastic (b) Curbside Grade B PET (c) Glass Sep-2017 $1,270 $400 $262 Oct-2017 $1,327 $377 $257 Nov-2017 $1,330 $351 $250 Dec-2017 $1,318 $331 $241 Jan-2018 $1,358 $321 $227 Feb-2018 $1,360 $316 $216 Mar-2018 $1,360 $338 $210 Apr-2018 $1,353 $375 $218 May-2018 $1,423 $394 $223 Jun-2018 $1,460 $408 $231 Jul-2018 $1,450 $411 $238 Aug-2018 $1,422 $396 $234 Sep-2018 $1,356 $358 $209 Oct-2018 $1,312 $320 $172 Nov-2018 $1,290 $303 $152 Dec-2018 $1,290 $295 $150 Average, Jan.-Sept.'18 $1,394 $369 $223 Average, Oct.-Dec.'18 $1,297 $306 $158 Percentage decline 7% 17% 29% Flint: $30.50 since Aug'17 Amber: $27.50 since Jan'16 Green: $12.50 since Jan' mix recyc./disposal: -$40: Oct'17-Jan'18 -$37.50: Jan-Mar'18 -$30: Apr'18-present *Monthly averages of weekly scrap values published by Recyclingmarkets.net (Historical data/subscription only). Regional average values encompassing all of CA and NV. (a) Aluminum cans, sorted, baled, and picked up. (b) PET plastic, baled, picked up. (c) PET plastic, Curbside Grade B in CA, baled, picked up. Container Recycling Institute,