07/07/2008 Council Packet - Laserfiche WebLink

Home Search

Memorandum June 19, 2008 electricity. When the commodity rates increase rapidly, the gross revenues of utilities increase. The straight percent of gross revenue fee would increase accordingly, to the hardship of the customer paying high gas and electric prices. While the utilities are passing through their own costs and not generating "windfalls" in the way some may argue oil companies do in spiking oil prices, cities clearly receive enhanced revenue because it is not recovering its costs but raising pure revenue. Thus, the already less - than- popular franchise fee can be seen by residents and businesses a spiking and increasingly unfair "windfall" fee. 3. The percent of gross revenue approach can result in substantial increases and capture growth, but it is also subject to reductions that make it a less predictable revenue source. If commodity prices were to fall dramatically or usage be reduced (due to conservation or alternative energy or alternative sources of gas or electricity), the revenues to the utility and the city would decrease accordingly. For budget and planning purposes, this could be problematic. The most drastic example of this problem actually occurred 20 years ago with the City of St. Paul and its gas franchise. Through the above - mentioned deregulation, the franchise gas utility ceased to be the primary provider of certain large customers, thus dropping the franchised utility's revenues and the franchise fee with it. This is unlikely in a regulated environment, but more of a possibility in a deregulated environment. Again, modifications can be made to the gross revenue approach to mitigate some of the unfair aspects described above. A cap can be placed on the amount of a franchise fee and percentages used can vary based on customer class and even income levels. These are difficult to administer and are often resisted by the utilities for that reason, however. Meter Fees This is the most common form of franchise fee since at least 2000. It attaches the fee to each meter which is usually, but not always, one per customer. Utilities favor it because it is fixed and inevitably results in a far lower franchise fee imposed on large businesses than the gross revenue method. A typical franchise fee in many Minnesota cities is $1.50 per month per meter (e.g. residential household and single- metered small business) and an increased amount as the size of the customer increases but always scheduled and fixed for a predictable recovery. Note that meter fee revenues can be converted into a percent of gross revenue calculation to determine equivalents. Pros: 1. As noted, it is a fixed and predictable amount. Thus, it is good for city and customer budgeting purposes. 2. It captures revenue from growth in a city. When new homes and commercial buildings are built, meters are added and revenue generated in a predictable amount. 3. The fixed aspect of meter fees is less likely to agitate individuals and business owners who have accepted, or resigned themselves to, the franchise fees when first adopted. 335300v1 JMS LN140 -105