BEFORE THE WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION In the Matter of the Petition of Commission Staff for a Declaratory Ruling. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ) Docket No. TG-970532 ) ) Petition for Declaratory Ruling Pursuant to RCW 34.05.240 and WAC 480-09-230, the Staff of the Washington Utilities and Transportation Commission ("Commission") respectfully files this petition for a declaratory order. Staff requests the Commission rule on a number of issues concerning the competitive practices of biohazardous or biomedical waste carriers operating in this state. Specifically, Staff requests a ruling from the Commission concerning (1) whether statutes and rules which govern charging tariff rates and discontinuing service apply to service agreements for the collection and disposal of biomedical waste, i.e., requirements for a minimum length of service, extended notice time for cancellation, and liquidated damages provisions, (2) whether application of a statutory exception allowing carriers to charge free or reduced rates in the highly competitive market of collection and disposal of biomedical waste for charitable or not-for-profit hospitals and clinics continues to be appropriate in a competitive environment, and (3) the meaning of a carrier’s obligation to serve under a certificate granted by the Commission, where the Commission has granted certificates to more than one carrier in a particular service area. I. BACKGROUND Staff has become concerned about the issues noted above after receiving informal complaints from consumers and through discussions with and correspondence from the carriers themselves. Staff believes these issues have arisen due to the highly competitive market for transportation of biomedical waste in the State of Washington. There are currently 75 solid waste carriers with authority to transport biomedical waste in limited service areas of the state, and 2 carriers of biomedical waste with statewide authority. While the carriers with statewide authority are in competition with each other across the state, they also compete with carriers in limited service areas. In granting certificates which allow competition between carriers, the Commission has stressed that the Commission will give considerable weight to the needs of shippers in determining whether to grant a certificate to a competing carrier where carriers provide specialized service, such as in the transportation of biomedical waste. Order M.V.G. No. 1707, In re Medical Resource Recycling System, Inc., Hearing No. GA-76820 (May 1994) at 3-4; Order M.V.G. No. 1761, In re Ryder Distribution Resources, Inc. and Stericycle of Washington, Inc., Hearing Nos. GA-75154 and GA-77539 (Aug. 1995) at 11-12. In addressing the issue of competition, the Commission has stated: While competition may operate in a limited market to reduce available business to uneconomic levels, it is also true that competition can bring benefits to consumers. The record in this proceeding shows both. There has been a reduction in the number of carriers, but when comparing the services available at the time of the first hearings with those available at the time of the second, it appears that substantial improvements occurred in the range of services offered by carriers serving this market and the ability of carriers to meet the particular needs of generators of this specialized waste stream. Order M.V.G. No. 1761, at 13-14. Staff believes that competition in the transportation of medical waste has indeed resulted in benefits to customers in this state by providing service options which were previously not available. However, as the carriers adjust to a competitive environment, Staff believes certain practices exist which are anti-competitive and detrimental to customers and the carriers. As referenced above, these practices include the presence of terms requiring a minimum length of service, extended notice requirements for cancellation, liquidated damages provisions in "service agreements" developed by the carriers, and bidding "wars" between carriers to provide service to charitable or non-profit hospitals and clinics. Staff is also concerned that despite their obligation to serve all customers in a service area, carriers with authority to transport biomedical waste for collection and disposal may not hold themselves out to provide service in less profitable areas. Staff believes competition between carriers should be fair, not destructive, discriminatory or unreasonable. Thus, Staff seeks to resolve the issues through a declaratory ruling by the Commission. A declaratory ruling will likely resolve the issues more quickly than a complaint proceeding, will allow all carriers who transport medical waste to participate in the process, will resolve the issues on an industry-wide basis rather than a carrier-by-carrier basis, and will hopefully provide clear operational guidelines to carriers in a competitive market and greater protection to the consuming public. II. ISSUES A. Service Agreements: The Commission has received several letters and telephone calls from clinics and hospitals complaining of provisions in service agreements they have signed with certain carriers. Staff has also reviewed the service agreements of other carriers for comparison. The service agreements usually provide for a three-year term of service, and may include a requirement that the customer provide the carrier with 60 or more days notice of cancellation. The service agreements may also include a liquidated damages provision, which is intended to compensate the carrier for the loss of income from the remaining term of the agreement in the event the customer terminates the service before the expiration of the three-year term. Staff is concerned that the use of terms requiring a minimum length of service, liquidated damages and extended notice of cancellation violate Commission statutes and rules governing charging tariff rates and discontinuance of service. These provisions are not acceptable requirements for service by a regulated carrier. Staff is not opposed to the use of service agreements in providing specialized service such as the transportation of biomedical waste. In fact, service agreements are useful in establishing the type of waste that the carrier will and will not accept, i.e., biomedical, not hazardous, waste, how the waste is to be sorted and packaged for collection, and establishing the number of pick-ups per month. However, provisions in service agreements must comply with Commission rules and regulations. The Commission rule governing discontinuance of service, WAC 480-70-710(1), provides: A customer may discontinue service by notifying the company to stop service. The notice shall be made to the company at least three full business days before the next scheduled pickup. Requiring a customer to provide more than three business days notice of cancellation appears to violate this rule. In addition, requiring a customer to sign an agreement specifying a minimum term of service discourages the customer from exercising its right to terminate service under the rule and choose another carrier. Likewise, including a liquidated damages provision in a service agreement clearly discourages customers from exercising their right to terminate service under the rule and choose service provided by another carrier without restriction. In addition, Staff believes liquidated damages provisions violate RCW 81.28.080 Although RCW 81.28.080 refers to transportation of persons or property, and solid waste is not considered property, solid waste collection companies are subject to this statute. See WAC 480-70-440., which provides in part: No common carrier shall charge, demand, collect or receive a greater or less or different compensation for transportation of persons or property, or for any service in connection therewith, than the rates, fares, and charges applicable to such transportation as specified in its schedules filed and in effect at the time. Liquidated damages are a charge or demand for compensation by the carrier for the revenue lost for failure to complete a term of service. Under WAC 480-70-710(1), customers may discontinue service after giving three business days notice. A carrier has no right to insist upon a longer term of service under the rule. In addition, no carrier has a liquidated damages charge in its tariff filed with the Commission. Thus, not only are such charges inappropriate in service agreements, but they violate Commission rules and regulations for charging tariff rates. Staff understands that carriers prefer minimum lengths of service, extended notice of cancellation and liquidated damages provisions in service agreements in order to encourage long term service with customers, stabilize routes, and ensure that they can recover startup costs over the long term. Although Staff believes the service agreement provisions discussed above are inappropriate, Staff is mindful of the carriers’ desire for route stabilization and recovery of start-up costs should a customer choose to cancel service soon after initiating service. Staff believes that such issues can be addressed more appropriately through tariff provisions such as a non-refundable initiation or start-up fee. Were carriers operating in an unregulated market, such provisions might be appropriate.1 However, in a regulated environment, Staff believes customers should be free to cancel service and change carriers without restriction. Under RCW 81.77.030, the Commission has authority to supervise and regulate every solid waste collection company in this state, 1) By fixing and altering its rates, [and] charges . . ., 2) By regulating the accounts, service, and safety of operations, . . . [and] 4) by supervising and regulating such persons or companies in all matters affecting the relationship between them and the public which they serve. Service agreements are certainly within the Commission’s authority to “supervise and regulate” under this statute. Staff believes that service agreement provisions which discourage customer freedom to choose a different carrier are not consistent with Commission rules and regulations. B. Free or Reduced Rates: There is an exception to the rule that carriers may only assess rates and charges set forth in tariffs filed with the Commission. RCW 81.28.080 provides, in part, that “[c]ommon carriers subject to the provisions of this title may carry, store, or handle, free or at reduced rates, property for . . . charitable purposes”. The plain wording of the exception in the statute is permissive, not mandatory. It allows the Commission to permit carriers to charge free or reduced rates under certain circumstances, but does not mandate free or reduced rates. Thus, it is within the Commission’s discretion to determine whether carriers may charge free or reduced rates. As an example of one circumstance in which this exception was applied, on November 22, 1991, Commission Staff issued an interpretation letter to a carrier allowing use of free or reduced rates to non-profit hospitals and clinics. (Attached as Exhibit A). Commission Staff issued this letter at a time when there was no direct competition between carriers for transportation of medical waste for collection and/or disposal. The letter was a Staff opinion, which is not binding on the Commission, based upon a Washington Supreme Court interpretation that non-profit hospitals can be regarded as committed to a charitable purpose. The practice of charging not-for-profit hospitals and clinics a reduced rate for service is described in Commission Order M.V.G. No. 1761. In re Ryder Distribution Resources, Inc. and Stericycle of Washington, Inc., Hearing Nos. GA-75154 and 77539 (Aug. 1995) at 6-8. The discussion focuses on whether a marketing agreement between the applicant-carrier and a hospital association constituted an illegal rebate. The marketing agreement was based upon the hospital association promoting or marketing the carrier’s services to non-profit hospitals and clinics and included a payment to the association based on revenues generated by non-profit hospitals using the carrier’s services. The carrier argued that the non-profit hospitals were “nontariff customers” or customers to which a tariff did not apply. The Commission, however, found the agreement to constitute an illegal rebate. The Commission found the agreement an “impermissible preference to certain customers--focused on those to whom the law allows a reduction in rates, perceived by the parties as an element of competition.” Id. at 7. The Commission also noted that in order to be a true marketing agreement there would be “no distinction between services (or payment) with reference to non-profit institutions and those provided with reference to not-for-profit institutions.” Id. at 8. The marketing agreement has since been modified so that it does not result in a rebate or relate to marketing to only non-profit hospitals or clinics. However, the fact that the carrier believes there is a need for a marketing agreement shows there is great competition between carriers in the medical waste market. Staff is concerned that the current practice of allowing carriers of biomedical waste to charge reduced rates to charitable or non-profit hospitals and clinics is no longer appropriate. The practice appears to be discriminatory, given that carriers provide the same service to for-profit hospitals at the tariff rate.2 Now that there is competition between carriers for transportation of medical waste, it appears that allowing carriers to charge reduced rates to charitable or non-profit hospitals and clinics has encouraged bidding wars between the carriers which may be detrimental to a carrier’s financial viability and its ability to transport waste at tariff rates to clinics and hospitals not eligible for reduced rates. The question, then, is under what circumstances the Commission should allow carriers to charge free or reduced rates. The statute refers to allowing free or reduced rates for “charitable purposes” rather than to charitable organizations. However, in determining whether a carrier seeks to provide free or reduced rates for charitable purposes, the Commission should look first to whether the shipper is a charitable organization, as there is likely to be no charitable purpose for transportation without a charitable organization as a shipper. In the present situation, the hospitals and clinics to which carriers are charging reduced rates operate as non-profit organizations. Under Washington law, hospitals are generally considered to be dedicated to charitable purposes when operating on a non-profit basis as they treat patients regardless of their ability to pay. In re Rust’s Estate, 168 Wash. 344, 12 P.2d 396 (1932). Thus, if hospitals and clinics are operating on a non-profit basis, they are probably operating as charitable organizations. After considering whether the shipper is a charitable organization, the Commission should determine whether the transportation is for a charitable purpose. Providing transportation of medical waste for a charitable organization is not, by itself, a charitable purpose. Carriers provide the same service to for-profit hospitals and clinics, and yet are prohibited from charging reduced rates. Under the current practice, the difference is not the type of service provided, but the organization to whom the service is provided. Allowing free or reduced rates might be appropriate under circumstances where there is only one carrier providing service, and the non-profit organization can show the carrier’s rates will cause it to reduce or limit services it might otherwise provide to the public. However, Staff does not believe free or reduced rates should be allowed where the purpose is a competitive practice to encourage hospitals or clinics to use the services of one carrier rather than another, and when competition is so stiff as to result in hospitals and clinics requesting bids from different carriers to obtain the lowest rate. In such situations, Staff believes free or reduced rates are being offered for competitive, not charitable, purposes. Whenever a carrier is allowed to charge free or reduced rates to a shipper, there is an impact on the carrier’s financial health and its ability to provide service to all other customers without increasing its tariff rates. By charging less to one or more customers, a carrier derives less revenue from its operations. The tariff rates a carrier files with the Commission are based upon the cost to provide service to all customers in its service area. Charging lower rates to certain customers will therefore have a financial effect on the carriers’s short-term revenue stream and its ability in the long term to provide service to its remaining customers without requesting a rate increase from the Commission. Charging free or reduced rates is an exception to the general rule that carriers must charge tariff rates. The current practice of carriers charging reduced rates to all non-profit hospitals and clinics has made the exception less of an exception and more of a rule. Staff questions whether the current practice is appropriate under the statute, and believes it has resulted in competition which is detrimental, not beneficial, to the carriers. Thus, Staff requests the Commission issue an order rejecting the current practice, or setting guidelines for charging free or reduced rates for charitable purposes. C. Obligation to Serve: As stated previously, Staff believes that competition in the transportation of biomedical waste has benefitted customers in the state. However, Staff is concerned that competition between carriers be fair, and not destructive, to the customers and carriers. Staff is concerned that carriers operating in a competitive environment will seek to serve, and focus their marketing efforts, primarily on the more profitable customers and will not hold themselves out to serve less profitable customers. Staff is particularly concerned about the obligation to serve rural customers. Staff is aware that there is a cost associated with initiating service and establishing routes which increases as the density of customers decreases. However, the cost of providing service does not excuse a carrier from its obligation to serve. Firms operating in a competitive, yet unregulated, market are under no obligation to provide service to any particular customer at any particular price. A firm may target or market its services to customers of its own choice or adjust prices to compete with other firms. These practices can result in cream skimming or predatory pricing. However, solid waste carriers which obtain certificates from the Commission to operate in a specific service area have an obligation to serve all customers in the service area at the tariff rate. If more than one carrier operates in a particular service area, each carrier still retains an obligation to serve all customers in the area by holding itself out as available to provide services to all who seek it. The Commission clearly stated this rule in Order M.V.G. No. 1596: Regulated solid waste collection companies must provide universal waste collection without discrimination. . . . If [a carrier] is not subject to regulation, it may serve anyone it chooses at any rate it chooses. If it is subject to regulation, it must operate under pertinent law. In re Ryder Distribution Resources, Inc., Hearing No. GA-75154 (Jan. 1993) at 9. In order to ensure a fair competitive arena, Staff recommends the Commission set forth specific ground rules or guidelines for the obligation to serve. In particular, Staff recommends that carriers who hold or obtain certificates from the Commission be required to hold themselves out to provide service by publicly advertising their services throughout the service area. This can be achieved through the use of telephone directories, newspapers, trade magazines or customer billing. A requirement to hold oneself out to the public does not ensure that carriers will not engage in selective marketing, but it will allow potential customers to seek out the carrier, rather than the reverse. In addition, if carriers have nonrecoverable expenses due to start-up costs for initiating service and routing to rural and other customers, Staff believes one solution is to reflect the cost in a company’s tariff. For example, a carrier could request a nonrefundable start-up fee to cover the cost of initiating service. Thus, if a customer canceled service for any reason soon after initiating service, the carrier would not be harmed financially. Staff believes these measures will encourage carriers to fulfill their obligation to serve all customers in their service area, as well as discourage anti-competitive activity in marketing services to customers. III. RELIEF SOUGHT In order to promote fair and reasonable competition between carriers of biomedical waste, Staff requests the Commission issue a declaratory ruling ordering that: 1) Any requirement for a minimum length term of service or notice of cancellation in a service agreement be subject to the terms of WAC 480-70-710(1); 2) Liquidated damages provisions in service agreements be prohibited as a violation of RCW 81.28.080; 3) Carriers may not charge free or reduced rates to charitable or non-profit hospitals or clinics under RCW 81.28.080 without demonstrating a “charitable purpose”; 4) A carrier’s obligation to serve all customers in a service territory requires the carrier to hold itself out to provide service to all customers by advertising throughout their service territory; and 5) Any carrier who violates the Commission’s order shall be subject to penalty under RCW 81.04.405, or suspension or revocation of its certificate under RCW 80.77.030. Providing for penalties and other enforcement measures for violation of the Commission’s declaratory ruling will make it clear to carriers that the Commission will not tolerate anti-competitive activities in the transportation of biomedical waste. IV. CONCLUSION Although competition in the transportation of biomedical waste has brought benefits to customers in the state, Staff is concerned that carriers may be engaging in practices which are anti-competitive, and unfair to both customers and carriers. For the reasons set forth above, Staff requests the Commission issue a declaratory ruling concerning the anti-competitive practices of biomedical waste carriers in the state ordering the carriers to comply with Commission rules and regulations concerning cancellation of service, filing of tariff rates, charging free or reduced rates, and the obligation to serve. Such a ruling will allow fair competition which benefits both customers and carriers. DATED this ________ day of March, 1997 CHRISTINE O. GREGOIRE Attorney General ___________________________________ MARY M. TENNYSON Senior Assistant Attorney General Counsel for Staff of the Washington Utilities and Transportation Commission ENDNOTES: 1 It is interesting to notice, however, that the U.S. Department of Justice recently settled antitrust complaints it filed against two national waste disposal companies. U.S. v. Waste Management, Inc., No. CV496-35 (S.D. Ga 2/15/96); U.S. v. Browning -Ferris Industries, Inc., No. CV00297 (D.D.C., 2/15/96). In the complaints, the Department of Justice asserted that the companies had interfered with competition with other companies through service contract provisions for automatic renewal and steep penalties for early cancellation. 2. In fact, the Commission rejected a stipulation in a rate case that included exceptions from certain charges based solely on the non-profit status of the customer. Third Supplemental Order Rejecting Stipulation, WUTC v. US Ecology, Inc., Docket No. UR-950619 (July 1995) at 2.