Shakopee Franchise Fee Memo to City Council

8/15/2019 Shakopee Franchise Fee Memo to City Council

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COMMUNITY PRIDE SINCE 1857129 Holmes Street South • Shakopee, Minnesota • 55379-1351 • 952-233-9300 • FAX 952-233-3801 • www.ShakopeeMN.gov

To: Mayor and City Council

CC: Bill Reynolds, City Administrator

From: Darin Nelson, Finance Director

Joy Sutton, Grants & Special Projects Coordinator

Date: May 27, 2016

Re: Franchise Fees

Franchise Fee Analysis

Several questions were asked by council members at the May 17th public hearing regarding

franchise fees which garner additional explanation and research. Franchise fees are a complicated

topic; I will recap and expand upon the slide presentation that Mr. Reynolds provided that evening,

making sure to address council’s specific questions.

What are franchise fees?

Minnesota Statutes, section 216B.36 grants cities the authority to impose a fee for use of public

right-of-ways. The utility companies collect the fee from their customers and remit collected fees to

the city on a set schedule, typically every quarter. Cities have the right to determine the amount,

structure, and use of the fee. As of 2014, 101 cities in the seven county metro have instituted

franchise fees. This number has grown to 357 state-wide.

A common question regarding franchise fees is if it is the same as a tax. This topic is always

debatable, but what is not debatable is that fees are spread across all users. Property taxes are not

paid by tax exempt properties, such as schools, churches, governments, etc. The franchise fee is

essentially spread out over a larger base of actual users of utility services.

What can franchise fees be used for?

Franchise fees can be used for any public purpose. Staff suggests the fees be dedicated to future

capital improvements such as pavement management, road maintenance, and construction

projects. Gas and electric utilities are paying for the use of the city’s right-of-ways, so it only makes

sense that these dollars be directed towards the costs most closely associated with the right-of-

ways.

How is the franchise fee structured?

The franchise fee can be structured in a few different ways. The two most common are a fixed

monthly fee per account or a percentage of energy usage. Both flat fees and percentage fees can be

set up with parameters based on the type of customer, such as residential and small or large

commercial/industrial users. The city has the discretion on how the fee is to be applied.


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What utilities would a franchise fee applied to?

The utility franchise fee would apply to all utilities currently utilizing the city’s right-of-ways: Xcel

Energy (gas and electric); CenterPoint (gas); and Minnesota Valley Electric Co-op (MVEC) (electric).

Shakopee Public Utilities (SPUC) currently pays a quasi-franchise fee in the form of a Payment in

Lieu of Taxes (PILOT) that equates to 2.71% of gross sales. In addition, SPUC contributes the

energy for the city’s street lights which amounts to approximately 0.42% of gross electric sales.SPUC’s total city contribution was 3.13% of their gross sales for 2015, which amounted to just over

$1.3 million.

The implementation of a franchise fee provides equity among all the utilities for use of the city’s

right-of-ways. Currently, only SPUC is paying the city for that use which puts them at a competitive

disadvantage. A franchise fee at a rate similar to SPUC’s current contribution would put all the

utilities on an equal level.

What impact would the franchise fee have on residents and businesses?

It depends on the rate and structure of the fee. Staff is recommending a 3 percent franchise fee,

which approximates to SPUC’s current contribution. The advantage of a percentage fee is that allusers pay the same fee based on a percentage of their bill no matter the type or amount of energy

consumed. If the City were to implement a standard flat fee for all users who generated the same

amount of revenue as the percentage fee, a flat fee of approximately $3.00 per month per utility

would have to be implemented. However, a constant flat fee across all customer types tends to

create a regressive fee structure, meaning that the small energy user ends up paying a higher fee

percentage compared to the high energy user.

The chart below compares the impacts of a flat fee to a percentage fee for both natural gas and

electricity customers. According to CenterPoint Energy, the 2015 average residential gas bill was

$57 per month. A 3 percent franchise fee on a $57 bill equates to $1.70 per month. Whereas, a $3

dollar per month flat fee on that same $57 bill equates to over 5 percent. The $3 flat fee becomes anincreasingly smaller percentage as the size of the natural gas bill increases. The second column on

the chart below provides the monthly dollar value impact for average natural gas users for each

customer classification.

The residential impact of the electrical franchise fee will impact only those residents that are

customers of MVEC. SPUC customers are already paying the electric franchise fee through

increased rates. The estimated impact of a 3% fee would be $2.64 per month based on a monthly

electrical bill of $88 for MVEC customers. MVEC has 88 customers in Shakopee’s city limits.

In the chart above, electricity comparisons are not available for commercial/industrial users. Xcel

Energy has no residential customers in Shakopee, and a total of approximately 160

commercial/industrial accounts between their natural gas and electric customers.

Customer Type

Residential $57 5.19% $1.70 $88 3.35% $2.64

Com - Small $51 5.75% $1.54 N/A N/A N/A

Com/Ind - Med $149 1.98% $4.47 N/A N/A N/A

Com/Ind - Large $1,126 0.26% $33.79 N/A N/A N/A

Dual Fuel-Small Volume $1,434 0.21% $43.01 - - -

Dual Fuel-Large Volume $8,560 0.03% $256.79 - - -

Natural Gas -

Estimated %

impact of a flat

$3.00 monthly fee

Natural Gas -

Estimated dollar

impact of a 3%

monthly fee

Electricity -

Estimated dollar

impact of a 3%

monthly fee

Electricity -

Estimated %

impact of a flat

$3.00 monthly fee

Natural Gas -

Average

Monthly Bill

Electricity -

Average

Monthly Bill


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Electric bills are private information compared to a city’s water and sewer bills which are public

information. I was able to calculate an average residential electric bill based off of SPUC’s total

customer count divided by their residential electric revenue. Since commercial/industrial

customers vary so much, trying to determine an average bill tends to be difficult and usually doesn’t

provide good data for comparison purposes.

CenterPoint was gracious enough to provide the city with a breakdown of their customer types andnumber of customers in each type. Xcel is unable to share this information to maintain customer

privacy. Xcel was able to provide an estimated total franchise fee amount of $416,000 at the 3%

rate. This is a combined amount between their two utilities.

City Revenue Estimates

The addition of franchise fees creates another revenue stream that allows the city to diversify its

revenues more. Property tax is the main revenue source for most Minnesota cities, and Shakopee is

no exception. As noted earlier, franchise fees are spread across all users, including tax exempt

properties. Preliminary estimates project approximately $920,000 of new revenue based on a 3%

franchise fee. SPUC’s annual contribution of approximately $1.3 million is excluded from this new

revenue, since they have been contributing their PILOT for many years. The chart below provides a

breakdown of the estimated franchise fees generated from each utility.

Combined Franchise Fees across all Utilities

Utility Gas or Electric Estimated AnnualRevenue

SPUC Electric $1,313,996

Xcel Energy Both $416,000

CenterPoint Gas $503,000

MVEC Electric $1,775

Total $2,234,771

Future Years

Part of the rational for recommending a percentage franchise fee is it mirrors the current practice

of SPUC. The other part of the rational is a percentage fee should generally increase over time as

both expansion and utility rates increase. The expansion or growth of the city would positively

affect franchise fee revenue no matter if the fee was a percentage or a flat fee. However, as utility

rates increase over time, a flat fee would remain constant but a percentage fee would garner

additional revenue. A number of cities with flat rates find themselves renegotiating flat fees on a

$920,775

of new

revenue


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more frequent basis, since their revenue projections are not necessarily growing at the same rate as

inflation.

The downside to percentage rates fees is if there are warm winters or cool summers, utility usage

can fluctuate and not generate as much revenue as initially intended. A flat fee takes this risk out of

the equation, but a flat fee does not keep up with inflation. By using a percentage of the bill,

franchise fees would be expected to keep pace with inflation through the combination of utility rateincreases and customer growth.

In regards to growth in Shakopee and based on the average residential gas and electric bills, new

development would provide approximately $52 per year per residence. So, for every 100 new

residential properties the city would expect to collect just over $5,000 annually.

CenterPoint Energy Analysis

The next chart is a franchise fee analysis that CenterPoint Energy provided to the city. The box on

the top of the chart details the number and type of customers within the city, along with annual

revenue amounts, and average annual and monthly customer bills. The annual and monthly

customer bills are also adjusted to mirror a “weather normal” year.

The next two boxes on the chart provide “what-if” scenarios based on funding levels. The middle

box estimates total revenue based on a percentage fee and an equal per meter fee without taking

the customer classification into account. The third box on the chart provides information on what

a graduated flat rate per meter would need to generate an amount equal to a 3 percent fee.

CenterPoint’s information was extremely beneficial in developing revenue and impact estimates.

CenterPoint representative Ms. Nicko Spehn, who attended the last council meeting, has been

gracious in supporting this process.


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CenterPoint Energy Franchise Fee Analysis DATE Analysis was done: 3.18.2016

City of: Shakopee

Data: 12 months ended December 2015

Weather Normal Weather Normal Weather Normal

Rate Class* Customers Volume Revenue Revenue Annual Bill Monthly Average

(meter) (In Therms) Estimate Per Customer Bill Per

(a) (b) (c) (d) (f) Customer Residential 13,013 9,596,344 THM $ 8,105,010.00 $8,869,974.53 $682 $56.80

Com - A 408 253,318 THM $ 229,656.00 $251,331.32 $616 $51.33

Com/Ind-B 320 708,664 THM $ 522,738.00 $572,074.90 $1,788 $148.98

Com/Ind-C 336 6,231,948 THM $ 4,149,726.00 $4,541,384.15 $13,516 $1,126.34

SVDF - A 29 1,151,474 THM $ 455,914.00 $498,943.93 $17,205 $1,433.75

SVDF - B & LV 20 17,268,085 THM $ 1,877,131.00 $2,054,297.79 $102,715 $8,559.57

TOTAL 14,126 35,209,833 THM $ 15,340,175.00 $16,788,006.62

Heating Degree Days-Actual 6,728

Heating Degree Days-Normal 7,363 $16,788,007 Weather Normal

Revenue Estimate

REVENUE PREDICTION MODEL # 1

Assumes each meter is assessed fee equally -either by % or flat fee per meter

% of Franchise Meter Fee By

Franchise Fee Needed Month

Revenue

(e) (f) (g)

$100,000 0.60% 0.59$

$200,000 1.19% 1.18$

$300,000 1.79% 1.77$

$400,000 2.38% 2.36$

$503,000 3.00% 2.97$

REVENUE PREDICTION MODEL # 2

Allows for a different flat fee to be assessed by each rate class (per meter)

Rate Class # of meters

Flat Rate Fee

per Month # months

Franchise Fee

Revenue (Yearly )

Weather Normal

Average annual

percent for each

rate class

Residential 13,013 1.70 12 $265,465 2.99%

Com - A 408 1.54 12 $7,540 3.00%

Com/Ind-B 320 4.47 12 $17,165 3.00%

Com/Ind-C 336 33.79 12 $136,241 3.00%

SVDF - A 29 43.01 12 $14,967 3.00%

SVDF - B & LG 20 256.79 12 $61,630 3.00%

TOTAL 14,126 $503,008 3.00%

* Rate Class Key:

SVDF = Small Volume Dual Fuel Com=Commercial

LVDF = Large Volume Dual Fuel Com/Ind = Commercial/Industrial


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Xcel Energy Analysis

The next graph is a listing from Xcel Energy of their current city-by- city electric franchise fee

schedules. I did an analysis on the information to determine some averages.

Residential flat fees average (62 cities) $2.22 per month

Residential percentage fee average (9 cities) 3.67% per month

Large C&I flat fee average $82.42 per month

Large C&I percentage fee average 3.67% per month

The Large C&I percentage fee group did have a couple cities that varied on the percentage based on

the consumption levels, but for the most part percentage fees are the same across all customer

types. Xcel Energy has indicated that they are not in favor of a percentage fee, but according to the

dates of their current franchise fee agreements, Xcel has cities with a percentage fee enacted in

recent history.


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Financial Assistance

A concern was brought forward by council members regarding how franchise fees may affect

residents in need and what avenues of help are available to them. The following graph outlines the

current programs of Shakopee’s four utility companies offered to residents who seek financial

assistance:

Utility Company

Payment

Plan or

Extension

Refer to

CAP

Low Income

Energy

Assistance

Programs

(LIHEAP)

Heat

Share

Energy

CENTS

Coalition

Low

Income

Discount

Reach

Out for

Warmth

Weatherization

Assistance

Program

Cold

Weather

Rule

Gas

Affordability

Program

(GAP)

Military

Assistance

Extreme

Heat

Law

CenterPoint Energy

MVEC

SPUC

Xcel Energy

CAP offers: 1. Energy Assistance Program (EAP). Households must apply by July 1 to receive assistance and meet household income guidelines.

2. Energy Related Repair (ERR). Funds are available to households experiencing no heat or malfunctioning heating systems.

Owner-occupied and eligible for EPA required.

3. Energy Crisis Assistance. Available only for those households on the EAP and for emergency situations only.

Low Income Energy

Assistance

Programs (LIHEAP): Federally funded to states. Available to households who are at or below 50% of the state medium income level.

HeatShare: Funded by Xcel Energy, CenterPoint and Salvation Army. Aid to primarily low income households with bill payment or equipment repairs.

Energy CENTS

Coalition: Combination of the GAP and former PowerOn programs. This non-profit agency gives lower income households discounts on their energy bills.

Low Income

Discount: Discounted rates for people over 62 years old and disabled.

Reach Out for

Warmth: Aids moderate income MN families who's income is too high for federal aid or don't qualify for non-profit programs.

Weatherization

Assistance

Program: Offers free energy saving and conservation techniques to reduce the cost of home energy and heathing bills to qualified MN households.

Cold Weather Rule: Households are protected form having their heat or power turned off annually from October 15 through April 15.

Gas Affordability

Program: Helps qualifying households lower their monthly gas bills and pay past due balances. Must receive LIHEAP to qualify for GAP.

Military Assistance: When a household member has been ordered to active duty, deployment or a change of duty station, assistance for the family is available to pay

their utility bills. Minnesota law protects military personnel from shut-off if they can’t pay their bill when certain conditions are met.

Extreme Heat Law: MN State law does not allow utility cooperatives to disconnect electric service to residential members if one of the following conditions is issue

by the National Weather Service in their county:

1. Excessive heat watch

2. Heat advisory

3. Excessive heat warning

Energy Assistance Available to Households in Shakopee


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Next Steps

If the Council agrees to continue pursuing franchise fees, staff will finalize proposed franchise fee

ordinances which will be sent to CenterPoint Energy, Xcel Energy, and MVEC. The city currently

has franchise agreements with these three utilities except for a franchise agreement with Xcel fortheir natural gas utility. The existing franchise agreements have a fee reservation clause that

stipulate a separate fee ordinance not be adopted until at least a 60-day notice has been served to

the companies by certified mail.

Staff and our city attorney will continue to work on a franchise agreement for natural gas with Xcel.

In the meantime, the proposed franchise fee ordinances will be sent to the appropriate parties. In

addition to the 60-day notification to the utility companies and once the ordinances have passed, an

additional 90-day notice from the utilities to the Minnesota Public Utility Commission is required.

After the 90-day expiration, the city’s tentative timeline would be for an effective date of around

mid-November. In reality, an effective start date of January 1, 2017 would work well from the city’s

standpoint. January 1 aligns with the beginning of the city’s fiscal year and would provide an

opportunity to budget for franchise fees in this upcoming budget cycle.

Summary

The implementation of franchise fees not only diversifies the city’s revenue streams, but also

equalizes the playing field for utilities within the City of Shakopee. SPUC has been providing the

city with a quasi-franchise fee for years which a majority of the city’s residents and businesses have

been supporting. It’s only fair business practice all utilities who benefit from the use of the city’s

right-of-ways be required to pay for that benefit.

Staff is seeking approval from council to officially notify utility franchisees of a proposed franchise

fee ordinance.

Shakopee Franchise Fee Memo to City Council

Documents

Transcript of Shakopee Franchise Fee Memo to City Council