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HomeMy WebLinkAboutUtility Franchise Fees STAFF REPORT Date: October 8, 2024 TO: Mayor and Council FROM: Clarissa Hadler, Finance Director AGENDA ITEM: Utility Franchise Fees Utility Franchise Fees are used by many cities to cover increasing costs of providing important services. These fees would result in higher utility bills for Lake Elmo residents and businesses. In 2022, city staff had received direction to move forward with utility franchise fees to generate additional revenues for the city. Soon after that, there was staff turnover, and the project was set aside. Staff again asked about it briefly at the July 2024 workshop, and council members seemed generally supportive of pursuing the additional revenue stream. In discussing the topic again at the August Budget Workshop, council members generally agreed that the preference was to have that revenue allocated to something in particular, though nothing was decided specifically at that time. The purpose of this workshop discussion is to establish the following; 1. Answer questions as necessary regarding the city’s authority is establish fees and what the process is. 2. What are the specific fees we want to charge? 3. Where would we like that fee revenue to be allocated? Attorney Robert Vose, Kennedy & Graven, is currently negotiating w/ Xcel regarding some of the terms of the franchise agreement. As such, we won’t go into the details of that agreement until said negotiations are more thoroughly worked through. Centerpoint Energy also has a number of customers in the city, so a separate, but similar, franchise agreement will be negotiated with them after the Xcel agreement is complete. The tables below show the high/low/averages electrical and gas franchise fees for all MN cities (flat rates only) and the Lake Elmo estimates provided at the August budget workshop. Staff looked at the fee estimates that were evaluated in 2022, long-term financial goals of the city, including tax rate goals, and started with a goal of $500,000 in annual franchise revenue. That goal is what Xcel utilizes to provide the fee estimates. Franchise Fees - Electricity Residential Small C&I Non-Demand Small C&I Demand Large C&I Average $ 3.08 $ 5.52 $ 20.60 $ 123.79 High $ 7.00 $ 21.94 $ 63.00 $ 990.00 Low $ 0.50 $ 0.50 $ 0.50 $ 0.50 Lake Elmo Prelim. Estimate ≤ $ 4.00 ≤ 6.00 ≤ 20.00 ≤ $ 125.00 Number of Cities 83 82 83 82 Franchise Fees - Gas Residential Commercial - Firm - Non-demand Commercial - Firm - Demand Small Interruptible Average $ 2.23 $ 8.37 $ 57.16 $ 45.02 High $ 6.69 $ 24.57 $ 485.00 $ 131.08 Low $ 0.50 $ 1.00 $ 1.00 $ 1.00 Lake Elmo Prelim. Estimate ≤ $ 2.00 ≤ $ 8.50 ≤ $ 57.00 ≤ $ 45.00 Number of Cities 37 37 32 33 Since the last discussion in August, Xcel has provided more thorough estimates for fees based on what our revenue goals are and their customer data. (See attached “Franchise Fee Options Review” for all options provided.) The final column in the attached Options Review document shows the revenue from combining “Electric - Option 2” with “Gas - Option 3” and has a total revenue around our goal of $500,000 per year. That information is shown below. Customer Rate Classification – Electric “Option 2” Fees Total Collections Residential 3.75 Small C&I: Non-Demand 2.50 Small C&I: Demand 23.00 Large C&I 175.00 Total Est. Annual Collection - XE Electric $ 340,479 Customer Rate Classification – Gas “Option 3” Fees Residential 2.00 Commercial Firm: Non-Demand 8.00 Commercial Firm: Demand 18.00 Small Interruptible 80.00 Med & Lrg Interruptible 175.00 Est. Annual Collection - XE Gas $ 152,796 Est. Annual Collection - Centerpoint Gas $ 9,360 TOTAL EST ANNUAL FEE REVENUE $ 502,635 All of these amounts are flexible and may be adjusted to Council’s preferences. The final discussion point is where Council would like the fees to be allocated. Council had expressed interest in the fees going toward a specific type of project. The most efficient way for this to occur is for Council to determine the capital fund that the money would be deposited and the ordinance setting the fees would specify this, though Mr. Vose recommends language to retain flexibility in the event the money is needed elsewhere. Capital fund options are below; 403 City Center Capital Fund 405 Park Capital Reserve 408 Street Maintenance Fund 409 Infrastructure Reserve Fund 410 Vehicle Replacement Fund Staff will adjust the final capital levies to be deposited to these funds to account for the decision made regarding the franchise fees. For ease of implementation, and minimization of change, staff would recommend selecting one of the new capital funds; the Park Reserve and Infrastructure Reserve being the most in need of revenue at the moment. Council had also inquired about the properties that are currently exempt from property taxes that would now be contributing to city services via these fees. Using County GIS data, staff estimates between 25-30 exempt properties totaling around $125M in Estimated Market Value would be contributing via franchise fees. Churches, cemeteries, and charitable institutions are the exempt properties that are not also a taxing jurisdiction – to which we do not pay taxes on our own facilities – and those totals are closer to 15 properties and $45M EMV. (Because Xcel does not share their customer data, we have to make assumptions as to which properties are served by utilities, such as having a building on the property.) Property Category Quantity Q (w/ Building +$20K) EMV 901 Schools-Public 11 3 53,542,100 915 Church 16 9 40,857,500 916 Church-Residence 1 1 2,044,800 917 Church-Other Res 4 4 2,428,800 918 Church - Other 2 1 408,500 931 Charit Inst 1 1 75,300 955 Co Srvc Other 19 4 23,277,800 962 T E Misc Co D 3 205 4 250,600 27 122,885,400 Decision Points; • What are the specific fees we want to charge? • Where would we like that fee revenue to be allocated? Next Steps; • Finalize Franchise Agreement negotiations with Xcel and Centerpoint. • Council Approval (November 5 or 19?) – Public Hearing required • Notice to utility companies at least 90 days prior to start of fee collection. • March 1, 2025 implementation Attachments; • Xcel – Franchise Fee Options Review • LMC Informational Memo – Gas & Electric Utility Franchising • Xcel Handouts City of Lake Elmo Franchise Fee Options Review Sep-24 Goal: Franchise fee revenue to raise $500,000 per year Customer Rate Classification - Electric Current Rate Aug 2024 Option 1 Option 2 Option 3 Option 3a Option 2 Residential -$ 3.25$ 3.75$ 4.25$ 4.00$ Small C&I: Non-Demand -$ 2.25$ 2.50$ 3.00$ 4.00$ Small C&I: Demand -$ 19.00$ 23.00$ 26.00$ 26.00$ Large C&I -$ 130.00$ 175.00$ 205.00$ 205.00$ Public Street Lighting -$ -$ -$ -$ -$ Municipal Pumping - ND -$ -$ -$ -$ -$ Municipal Pumping - Demand -$ -$ -$ -$ -$ Total Est. Annual Collection - XE Electric -$ 288,402$ 340,479$ 388,395$ 377,064$ 340,479$ Customer Rate Classification - Gas Current Rate Aug 2024 Option 1 Option 2 Option 3 Option 3 Option 3 Residential -$ 1.50$ 1.75$ 2.00$ Commercial Firm: Non-Demand -$ 6.00$ 7.00$ 8.00$ Commercial Firm: Demand -$ 12.00$ 15.00$ 18.00$ Small Interruptible -$ 70.00$ 75.00$ 80.00$ Med & Lrg Interruptible -$ 125.00$ 150.00$ 175.00$ Firm Transportation -$ -$ -$ -$ Interruptible Transportation -$ -$ -$ -$ Est Annual Collection - XE Gas -$ 114,762$ 133,779$ 152,796$ Est Annual Collection - Centerpoint Gas**5,562$ 6,489$ 9,360$ Total Est Annual Collection - Gas 120,324$ 140,268$ 162,156$ 162,156$ 162,156$ TOTAL EST. ANNUAL FEE REVENUE TO CITY -$ 408,726$ 480,747$ 550,551$ 539,220$ 502,635$ *All calculations are estimates & may change based upon utility customer counts in any given month **Centerpoint Gas revenue calculation provided by CenterPoint Energy This material is provided as general information and is not a substitute for legal advice. Consult your attorney for advice concerning specific situations. 145 University Ave. West www.lmc.org 5/15/2024 Saint Paul, MN 55103-2044 (651) 281-1200 or (800) 925-1122 © 2024 All Rights Reserved INFORMATION M EMO Gas and Electric Utility Franchising Learn about city gas and electric utility franchising authority, especially authority to charge franchise fees. The League thanks James Strommen of the Kennedy and Graven Law Firm, who is attorney for the Suburban Rate Authority, for his assistance in creating this memo and the model and sample ordinances. RELEVANT LINKS: I. Franchising authority Minn. Stat. §216B.04 Minn. Stat. § 216B.36. Minn. Stat. § 301B.01. Minn. Stat. § 222.37. Minn. Stat. § 237.162. and Minn. Stat. § 237.163. Minnesota statute requires public gas and electric utility providers to provide safe, adequate, and efficient utility services. In order to do so, utility companies often need to use public rights-of-way, such as roads or sidewalks, to deliver their services. Since cities are responsible for the reasonable management of its rights-of-way, franchise agreements are often necessary. Franchise agreements are a contract between the city and the utility provider that allows the utility provider the right to use the public rights-of-way to install, maintain and repair their equipment located on public grounds or in the right-of-way. Cities have broad gas and electric franchise rights under state law. In Minnesota, these franchises are negotiated and take the form of a contract set forth in an ordinance. Cities have the right to require franchises and to include certain terms, such as franchise fees. There is little case law guidance on what specific franchise terms may be required by the city. Accordingly, a franchise can incorporate all reasonable terms within the limits of a city’s statutory franchise and police power authority. These rights are extensive and can be found in state statute and case law. II. Franchising ordinances Minn. Stat. § 237.162 and Minn. Stat. § 237.163. LMC Information Memo, Cell Towers, Small Cell Technologies & Distributed Antenna Systems. Minn. R. ch. 7819. There has been little legislative change in the scope of city franchise authority in recent years. However, in 2017 new laws regarding the regulation of telecommunications right-of-way users were adopted. Though outside the scope of this memo, it is recommended cities review their ordinances to ensure compliance with the new statutory requirements and new federal requirements. The main focus of discussion involving gas and electric franchises in the post-1999 right-of-way standards rules by the Minnesota Public Utilities Commission (MPUC) is the franchise fee. That remains a matter negotiated with the utility but also one where cities should take care to retain their full franchise fee rights in the franchise agreement itself. RELEVANT LINKS: League of Minnesota Cities Information Memo: 5/15/2024 Gas and Electric Utility Franchising Page 2 A. Fees Minn. Stat. 216B.361 Electric Utility Franchise Fee, City of Victoria sample ordinance. Gas Utility Franchise Fee, City of Victoria sample ordinance. The city’s legal right to include a particular franchise provision, and the practical realities facing a city when the utility refuses to agree, are two quite different matters. Though a city may have the right to insist on a franchise fee, potentially as high as 8 percent of the utility’s gross revenues, it is unlikely that the utility would readily agree to such a percentage, even though the utility passes the fee through to its customers within the city. Gas and electric utilities remain concerned that, despite their retained monopoly or near monopoly status, franchise fees will harm their position relative to perceived competitors. This fee pass-through also becomes an issue to the residential and business customers who pay the fee. Thus, cities must be careful to gauge the level of local acceptance or resistance to the exercise of their full franchise rights under the law. As a result of the realities of the franchise negotiation and community acceptance process, a “take it or leave it” franchise ordinance that includes the imposition of franchise fees and strict right-of-way management provisions may be difficult to enact without compromise. B. Right-of-way rules Minn. R. ch. 7819. Gas Utility Franchise, LMC model ordinance. Electric Utility Franchise, LMC model ordinance. The two franchise ordinances offered here incorporate many of the MPUC’s right-of-way management rules on such matters as street restoration, relocation for utilities, construction performance bonds, mapping information, street vacation, removal of abandoned facilities, and indemnification. The MPUC right-of-way rules were largely a product of negotiations between local government units and members of the utility industry, including a number of gas and electric providers. By all indications—lack of formal legal disputes over terms—these rules have been very successful. Minn. Stat. § 237.163 subd. 2(b). LMC Information Memo, Regulating City Rights-of- Way. To take full advantage of the rules and to fully implement the right-of-way management authority granted to cities by Minn. Stat. §§ 237.162 - .163, a city should consider adopting a comprehensive right-of-way management ordinance by exercising its option under state law. C. Model ordinance notes Gas Utility Franchise, LMC model ordinance. Electric Utility Franchise, LMC model ordinance. The two model franchise ordinances offered here are the result of a cooperative effort between the League of Minnesota Cities and James Strommen of the Kennedy & Graven Law Firm, attorney for the Suburban Rate Authority (SRA), a joint powers organization consisting of 29 Twin City suburban municipalities. RELEVANT LINKS: League of Minnesota Cities Information Memo: 5/15/2024 Gas and Electric Utility Franchising Page 3 The models are based on actual ordinances that have been reviewed by gas and electric companies. Because these models are more city-oriented than many currently existing franchises, utilities have objected to many of the provisions contained in these models. As a result, there is likely to be negotiation on at least the following provisions: • Franchise fees; in form, amount, and class of service distinctions. • Fee obligation on perceived competitors. • Where a city seeks additional rate and service consideration regarding renewable energy or infrastructure investment. • Rights regarding city-requested location and relocation of facilities. • The city’s right to amend the franchise during the term. Each city must evaluate the importance of the provisions contained in these models as such provisions may affect the city’s particular needs. One franchise cannot fit all because of the many variations of city-utility relationships, including factors such as urban, suburban, or rural settings; developing versus redeveloping cities; single versus multiple utilities serving the city; residential-commercial customer mix; larger employer versus diversified economic base; the presence of a municipal utility or contemplated utility; and revenue needs of the city. Electric Utility Franchise, LMC model ordinance. See Section 11, Service reliability, infrastructure reporting. Gas Utility Franchise, LMC model ordinance. See Section 10, Service reliability, infrastructure reporting. One section is taken from the City of Minneapolis-Xcel Energy Electric franchise. It introduces an agreement to obtain additional service and reliability reporting from the utility for comparison purposes among other utility service areas. These are matters governed by the MPUC and routinely produced by regulated utilities, but not on a city-by-city basis. This section is slightly different, depending on whether it is a gas or electric utility. Electric utilities have reliability issues such as outages and reduced power. Gas utilities bring the public safety risk of unsafe gas lines when infrastructure ages. This type of information is available to all customers through the MPUC. Putting a provision in the franchise establishing annual reporting may heighten the city and the company’s awareness of where improvements can be made within the city. For cities interested in establishing additional dialog with the utility and identifying its service record in the franchised city when compared with other cities, this provision can achieve greater awareness and perhaps heightened attention by the utility to the needs of the city. RELEVANT LINKS: League of Minnesota Cities Information Memo: 5/15/2024 Gas and Electric Utility Franchising Page 4 III. Further assistance James Strommen 612.337.9233 jstrommen@Kennedy- Graven.com. Patricia Beety, LMC General Counsel 651.281.1270 800.925.1122 pbeety@lmc.org INFORMATION SHEET MINNESOTA Some cities have imposed franchise fees on their energy providers as part of utility franchise agreements. As allowed by the Minnesota Public Utilities Commission, franchise fees levied on us are passed on directly to our customers within a city. This fee is itemized on our customer bills as a City Fee. A franchise fee can only be implemented if it is allowed by the city’s existing franchise agreement with us. If a community determines that a franchise fee is appropriate, there are several guiding principles that we follow in discussing fee options. •Franchise fees are set forth in a fee ordinance authorized by, but separate from, the franchise agreement. •An equivalent fee must be placed on all energy suppliers serving the city. •We will not be subject to permit fees while franchise fees are in effect. •We will prepare fee schedule options for the amount of revenue sought by the city. •The fee is calculated as a flat fee, per premise and is applied equally for all customers in a given rate class. •Fees are paid to the city on a quarterly basis. Franchise Fee Considerations As in any case where a city is considering a new revenue source, we urge careful consideration of the possible negative impacts of a franchise fee since they increase the cost of energy for all customers in that city. Timeline Implementing franchise fees is a complex process that requires adequate time for system programming and testing. Here’s a typical sequence of events: •City provides us with written notice of intent to enact a fee prior to formal consideration. •City and Xcel Energy negotiate the fee. •In order to meet the PUC’s requirements, the approved fee ordinance must be received by us at least 90 days before the anticipated start of fee collection. •We collect the fee from our customers monthly and transfer it to the city on a quarterly basis. Sample Timeline Utility Franchise Fees Day 1 Day 90 Day 120 Day 210 Day 240 City adopts ordinance Xcel Energy implements fee on customers’ bills Fee collection (Xcel Energy pays the city quarterly) Xcel Energy pays the city at the end of the month after the quarter’s fees have been collected Xcel Energy receives proposed ordinance xcelenergy.com | © 2016 Xcel Energy Inc. | Xcel Energy is a registered trademark of Xcel Energy Inc. Northern States Power Company-Minnesota | 16-01-638 INFORMATION SHEET MINNESOTA The Basics of Utility Service Electric and natural gas utility companies provide essential services to the public. Minnesota has designated electric utility service providers for each part of the state. These utilities have the exclusive authority and obligation to provide service to all customers in their designated service territories. State law allows utilities to use public rights of way to locate poles, wires and natural gas pipes. Public rights of way typically include public roads, highways, streets, bike lanes and sidewalks. Local governments have the responsibility to manage the rights of way and have an interest in where the utilities locate their facilities. Utility Franchise Agreements A franchise agreement sets expectations between a city and Xcel Energy, including how we construct, operate and maintain our equipment located in the public rights of way. Franchise agreements can also address things like roadway restoration when a utility project has been completed. In addition to the conditions in franchise agreements, cities may require utilities to obtain permits for work within the right of way. Franchise agreements do not set energy goals, determine the mix of energy resources used by a utility, set energy prices or service standards. Those policy decisions are made by the Minnesota legislature and regulated by the Minnesota Public Utilities Commission and cannot be included in franchise agreements. Xcel Energy Franchise Agreements We have more than 350 franchise agreements in Minnesota. These shared agreements enhance strong working relationships with the communities we serve by providing clear expectations while supporting consistent and efficient operations and service. In some cases, a city may choose to establish a franchise fee as part of the franchise agreement. This is done in cooperation with Xcel Energy and is executed through a separate ordinance, which can be implemented at any time during the life of the franchise agreement. In those cases, we collect the fee from our customers and transfer it to the city on a quarterly basis. Utility Franchise Agreements xcelenergy.com | © 2016 Xcel Energy Inc. | Xcel Energy is a registered trademark of Xcel Energy Inc. Northern States Power Company-Minnesota | 16-01-639