Electric and Gas Franchise Fee Proposed Increase OrdinanceMasterpiece on the Mississippi
Dubuque
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2007
TO: The Honorable Mayor and City Council Members
FROM: Michael C. Van Milligen, City Manager
SUBJECT: Proposed Increase in Franchise Fee Revenue from the Sale of Gas and
Electricity within the City of Dubuque
DATE: February 10, 2010
Budget Director Jennifer Larson is recommending the adoption of three ordinances
increasing the gas and electric franchise fees from the current 2% to 3% on the revenue
generated by the sale of gas and electricity within the City of Dubuque.
The increase in the fees is expected to generate $828,000 in Fiscal Year 2011, and
more in future years. The increased fees will be used 100% for property tax relief, as
are the existing gas and electric franchise fees. Without this increase in the fees, the
City Council would need to increase property taxes paid by the average homeowner by
6.73 %, instead of the recommended 2.47 %, or make substantial cuts in the City budget.
A unanimous vote of the City Council is needed for adoption of the ordinances.
I concur with the recommendation and respectfully request Mayor and City Council
approval.
MCVM:jh
Attachment
cc: Barry Lindahl, City Attorney
Cindy Steinhauser, Assistant City Manager
Jennifer Larson, Budget Director
Michael C. Van Milligen
Masterpiece on the Mississippi
Dubuque
Al-Ameiaah
11 11 l
2007
February 9, 2010
TO: Michael C. Van Milligen, City Manager
FROM: Jenny Larson, Budget Director
SUBJECT: Proposed Increase in Franchise Fee Revenue from the Sale of Gas and Electricity within
the City of Dubuque
History of the Franchise Fee
In 1993, the City Council adopted Ordinance Nos. 58 -93 and 43 -93 which granted Peoples Natural Gas
Company and Interstate Power Company, their successors and assigns, nonexclusive authority for a
period of twenty -five years to maintain and operate gas and electric distribution systems within the City
of Dubuque. The franchise ordinances were approved by referendum. The franchise ordinances
provide that the City Council may impose a franchise fee not to exceed three percent of the gross
revenue generated from the sale of natural and mixed gas and electricity within the limits of the City of
Dubuque.
In Fiscal Year 2004, when the State of Iowa reduced City revenues by $1.1 million after the City budget
was adopted and health care costs took a huge unexpected increase, the City had four viable choices:
1. Make major cost reductions, including employee layoffs;
2. Pay for the deficit by canceling Capital Improvement Projects, a one -time source of revenue that just
delayed the problem for one fiscal year when property taxes could be raised to deal with the shortfall;
3. Get concessions from the employees; and
4. Implement a Utility Franchise Fee.
The City Council chose to do all four. Five positions were cut, some Capital Improvement Projects
($378,791) were canceled, some of the unions and all the non - represented employees had changes in
their health care coverage and dental premiums, and a 2% Utility Franchise Fee was established.
The Utility Franchises require this fee be adopted by unanimous vote of the City Council. On
September 15, 2003, the City Council adopted Ordinance numbers 75 -03 and 76 -03, establishing a
franchise fee of two percent of the gross revenue of People's Natural Gas Company and Interstate
Power Company from the distribution and sale of natural gas or mixed gas and electricity within the City
of Dubuque. The City began collecting the gas and electric franchise fees on December 1, 2003.
In 2004, the City Council adopted Ordinance No. 20 -04 granting an electric franchise to Maquoketa
Valley Electric Cooperative thru October 3, 2018. The franchise ordinance provided for a 2% franchise
fee on the gross revenue generated from the sale of electricity within the City of Dubuque. The
franchise ordinance reserved the right of the City Council to increase or decrease the fee.
The 2% Utility Franchise Fee displaced the County 1% Local Option Sales Tax and the School District
1% Local Option Sales Tax on Dubuque resident's utility bills. Dubuque citizens did not see an increase
in their utility bills by the adoption of the 2% Utility Franchise Fee because they previously paid 2% in
Local Option Sales Taxes and State law does not allow both to be collected. The City's Local Option
Sales Tax Ordinance requires that 50% of Local Option Sales Tax revenue be used for property tax
relief, 30% be used for capital improvements that are street related, and 20% be used for capital
improvements that are facility- maintenance related. The collection of franchise fees allowed the City to
use all revenue for general property tax relief.
Des Moines' gas and electric franchise fees were challenged in the Iowa Supreme Court in the case of
Lisa Kragnes v. City of Des Moines, Iowa. The Iowa Supreme Court ruled that a city has the authority
to assess a franchise fee expressed as a percentage of the gross receipts derived from the utility's sale
of its services to the public, but the fee is limited to the reasonable costs of inspecting, licensing,
supervising, or otherwise regulating the activity that is being franchised. In determining fee, the
Supreme Court also said it is proper and reasonable to take into account, not the expense merely of
direct regulation of the utility, but all the "incidental consequences" that may be likely to subject the
public to cost in consequences of the business licensed. The Kragnes case was sent back to the trial
court to determine whether the franchise fees collected by Des Moines exceeded the Kragnes
limitations, and, if so, whether Des Moines should be required to refund the excess fees to the utility
customers.
Following the Kragnes decision, similar lawsuits were brought against several other Iowa cities,
including the City of Dubuque, challenging gas, electric and cable franchise fees in those cities.
In response to the lawsuit, the City of Dubuque hired the consulting firm of Springsted, Inc. to conduct a
cost analysis of the expenses related to regulating the Dubuque gas, electric, and cable utilities.
Springsted developed a fee schedule by utility and a report of its findings which involved the
determination of direct and indirect costs of regulating the utilities. The City has many costs associated
with the administration of the franchise agreements.
The City of Dubuque also hired an appraiser to determine what impact the location of utilities in right of
way has on the value of City owned land.
The City of Des Moines also retained Springsted, Inc. to conduct a similar survey of its costs to regulate
its utilities. Following the remand trial, the Polk County district court concluded that Des Moines'
franchise fees exceeded the Kragnes limitations and that Des Moines would be ordered to refund the
excess fees to the utility customers. That decision is now on appeal in the Iowa Supreme Court.
The franchise fee case in Dubuque has been stayed until there is a decision in the Kragnes appeal.
The results of these cases will determine if they City of Dubuque needs to refund any previous utility
franchise fee revenues.
In FY 2009, the estimated overall cost to the City of Dubuque for utilities located in the city rights -of -way
based on the estimates prepared by Springsted in FY 2006 was $6,772,956, which included
degradation costs of $286,524, construction costs of $737,004, operating costs of $1,778,971,
disruption costs of $1,720,457 and reduction in land value of $2,250,000. In FY 2009, the actual
franchise fee revenue collected was $1,497,421. The estimated cost in FY 2009 was $5,275,535 more
than the actual franchise fee revenue collected.
In 2009, the Iowa legislature amended the relevant state law provisions to allow a franchise fee
assessed by a city to be based upon a percentage of gross revenue generated from sales of the
franchisee within the city not to exceed five percent, but without regard to the city's cost of inspecting,
supervising and otherwise regulating the franchise. Before a city adopts or amends a franchise fee rate
ordinance or franchise ordinance to increase the percentage rate at which franchise fees are assessed,
a revenue purpose statement must be prepared specifying the purpose or purposes for which the
revenue collected from the increased rate will be expended. If property tax relief is listed as a purpose,
the revenue purpose statement must also include information regarding the amount of property tax
relief to be provided with revenue collected from the increased rate. The revenue purpose statement
must be published.
Inception -to -date, the Utility Franchise Fee in the City of Dubuque has generated $8,892,010, all of
which has been used for general property tax relief. This alternative source of revenue is one of the
factors that have allowed the City of Dubuque to keep property taxes the lowest in the state for Iowa
cities with a population of 50,000 or more.
Property Tax Rate Comparison
$20
$18
$16
$14
$12
$1
$8
$6
$4
$2
$0
$18.31 $17.97 $17.85 $17.85
- $1 o4
Tax Rate (FY 10)
$15.58 $15.22
12.43
$9.86
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Cie 1 C9
4 4e42
Tax Rate (FY 10)
Dubuque is the LOWEST in the state for property tax rate. The highest- ranked city (Waterloo) is 86%
higher than Dubuque's rate, and the average ($15.90) is 61% higher than Dubuque.
Dubuque's recommended FY 2011 property tax is $10.03, an increase of 2.47% (a cost of $13.62 per
year for the average homeowner) over FY 2010.
10 West Des Moines $951 $12.43
9 Iowa City $734 $17.85
8 Council Bluffs $668 $17.97
7 Cedar Rapids $640 $15.22
6 Davenport $583 $15.58
5 Waterloo $551 $18.31
4 Des Moines $518 $17.04
3 Ames $433 $10.81
2 Sioux City $432 $17.85
1 Dubuque $331 $9.86
AVERAGE w/o $612 $15.90
Dubuque
How the Gas and Electric Franchise Fee is calculated
46,403 3,552,031,762
62,220 2,559,738,879
58,268 2,167,338,783
120,758 5,078,997,614
98,359 3,680,515,185
68,747 2,069,706,082
198,682 6,037,631,219
50,731 2,030,775,716
85,013 2,056,046,120
57,686 1,935,666,751
87,887 3,248,086,818
Dubuque is the LOWEST taxes per capita in the state for property tax rate. The highest ranked city
(West Des Moines) is 188% higher than Dubuque's taxes per capita, and the average is 85% higher
than Dubuque. Comparisons for other communities are not yet available
In fiscal year 1981, full -time equivalents were 588.25. In fiscal year 2011, full -time equivalents
recommended are 546.59. This represents a 7.1% (41.55 FTE) reduction in full -time equivalents since
1981.
The gas service franchise fee is calculated by taking 2% of gross revenues generated from the sale of
natural gas and mixed gas within the City of Dubuque and the electric service franchise fee is
calculated by taking 2% of gross revenue generated from the sale of electricity within the City of
Dubuque.
The amount billed by the gas and electric companies for the sale of gas and electricity to its customers
may be adjusted for any net write -off of uncollectible accounts and correction of bills rendered, and past
or future franchise fees remitted to the City may be adjusted accordingly by the gas and electric
companies to reflect the lawful or necessary correction to billing and collection from its customers for
electricity and gas sold within the corporate limits of the City.
The City provides copies of annexation ordinances to the gas and electric companies on a timely basis
to ensure appropriate franchise fee collection from customers within the corporate limits of the City.
Alliant Energy, the successor to Interstate Power, does not bill any City of Dubuque accounts the
franchise fees. However, all other Dubuque customers are charged the fee and the City then rebates
the customers who are fully or partially sales -tax exempt. Black Hills Energy, the successor to Peoples
Natural Gas, does not charge the franchise fee to any of its customers that the City advises are fully
exempt from sales taxes and therefore exempt from the franchise fee. However, the City provides a
rebate to any customer who is only partially sales -tax exempt. The same franchise fee
rebates /exemptions would apply as well to the 3% fee.
Examples of organizations that are fully exempt from sales -tax include Dubuque Community School
District, Finley Hospital, Mercy Medical Center, Loras College, and University of Dubuque. There are
also organizations that are partially sales -tax exempt since gas or electricity is used for the purpose of
manufacturing which include A.Y. McDonald Manufacturing Company and Swiss Valley Farms.
Proposed Increase in Franchise Fee for Fiscal Year 2011
The recommended Fiscal Year 2011 budget includes a proposed increase of the franchise fees under
the City's franchise agreements with Black Hills Energy, Alliant Energy and Maquoketa Valley Electric
Cooperative from 2% to 3% on the sale of gas and electricity within the City of Dubuque. This 1%
increase in the franchise fee would not affect revenues collected by the School District or County.
On February 1, 2010 the City Council approved the revenue purpose statement required for the
proposed increase in the franchise fee. This revenue purpose statement established the purpose for
which franchise fee revenues may be used or expended to be for property tax relief only. The City
would use 100% of the revenue collected from the 1% increase in the gas and electric franchise fee for
property tax relief.
The franchise agreements require that any increase in the franchise fee must be passed by a
unanimous vote of the City Council.
The increase in the fee is expected to generate $828,000 in Fiscal Year 2011. Without this fee
increase, the City would need to increase property taxes paid by the average homeowner by 6.73%
instead of the recommended 2.47 %, or make substantial cuts in the City's budget.
To illustrate the impact to an average Dubuque homeowner, an analysis was conducted of three City
employees' personal gas and electric bills from the past 12 months to determine the impact of the 1%
franchise fee increase to residential customers. Two households were a family of five and one was a
family of four. Two of the households were homes built before 1960 and one was constructed after
2000 and all were of different square footage — the largest was 1,900 square feet and the smallest was
1,086 square feet. The impact of the 1% franchise fee will vary based on the size of the household,
energy efficiency of construction and appliances, and weather during the year. The three households'
bills analyzed will be a much higher impact of the 1% franchise fee than households with less than four
people. An average of the three households analyzed indicate that the 1% franchise fee increase
would increase gas bills by $9.00 annually and electric bills by $13.00 annually, or a total increase of
$22.00 annually. This is equivalent to an increase of less than $2.00 per month.
The following is a comparison of franchise fees charged by cities in Iowa. The City of Cedar Rapids is
also considering a 1% increase to their electric franchise fee.
Dubuque is the FOURTH LOWEST in the state for Gas and Electric Franchise Fees. The highest
ranked cities (Algona, Rock Valley, Windsor Heights, and Des Moines) are 67% higher than Dubuque's
rate, and the average is 4.9% lower than Dubuque.
I respectfully recommend adoption of the increased utility franchise fees.
JML
6 Algona 5.0%
6 Rock Valley 5.0%
6 Windsor Heights 5.0%
6 Des Moines 5.0%
5 Early (Electric) 4.0%
5 Lytton 4.0%
5 Manchester 4.096
5 Pleasant Hill 4.0%
4 Early (Gas) 3.0%
4 Huxley 3.0%
4 Monticello 3.0%
4 Dubuque (proposed) 3.0%
3 Anamosa 2.0%
3 Sioux City 2.0%
2 Iowa City 1.0%
2 Cedar Rapids (Electric) 1.0%
2 Boone 1.0%
2 Boxholm 1.0%
2 Madrid 1.0%
2 Ogden 1.0%
1 Oskaloosa .02%
Average w/o Dubuque 2.8%
cc: Barry Lindahl, City Attorney
Cindy Steinhauser, Assistant City Manager
Ken TeKippe, Finance Director
Preparer: Barry A. Lindahl, Esq. Address: Suite 330, 300 Main Street, Dubuque, IA 52001
Telephone: (563) 583 -4113
ORDINANCE NO. 7-10
INCREASING THE FRANCHISE FEE OF TWO PERCENT (2 %) OF THE GROSS
REVENUE OF ALLIANT ENERGY, ITS SUCCESSORS AND ASSIGNS,
GENERATED FROM THE SALE OF ELECTRICITY WITHIN THE CITY OF DUBUQUE
TO THREE PERCENT (3 %)
Whereas, City of Dubuque Ordinance No. 58 -93, adopted by the City Council on
the 4 day of October 1993, granted to Interstate Power Company, its successors and
assigns (hereinafter referred to collectively as the Company), nonexclusive authority for
a period of twenty -five (25) years to maintain and operate its electrical system within the
limits of the city of Dubuque; and
Whereas, Alliant Energy is the successor to Interstate Power Company: and
Whereas, Ordinance No. 58 -93 provides that the City Council may impose a
franchise fee not to exceed three percent (3 %) of the gross revenue of the Company
generated from the sale of electricity within the city of Dubuque; and
Whereas, Ordinance No. 58 -03 imposed a franchise fee equal to two percent
(2 %) of the gross revenue of the Company generated from the sale of electricity within
the city of Dubuque.
Whereas, the City Council has determined that it is in the best .interests of the
City of Dubuque to increase the franchise fee to three percent (3 %).
NOW, THEREFORE, BE IT ORDAINED BY THE CITY COUNCIL OF -j 11-1E CITY
OF DUBUQUE, IOWA:
Attest:
Section 1 of Ordinance No. 58 -03 is amended to read as follows:
Section 1. Effective June 1, 2010 and for the term of the franchise •
granted by Ordinance No. 58 -93, there is hereby imposed upon the Company a
fee equal to three percent (3 %) of the gross revenue generated from the sale of
electricity within the city of Dubuque.
Passed, approved and adopted the 15 day of Febr ary, 2010.
eanne F. Schneider, CMC
City Clerk
Roy D. /= uol, Mayor
Preparer: Barry A. Lindahl, Esq. Address: Suite 330, 300 Main Street, Dubuque, IA 52001
Telephone: (563) 583 -4113
ORDINANCE NO. 8-10
INCREASING THE FRANCHISE FEE OF TWO PERCENT (2 %) OF THE
GROSS REVENUE OF BLACK HILLS ENERGY CORPORATION, . ITS
SUCCESSORS AND ASSIGNS, GENERATED FROM THE DISTRIBUTION
AND SALE OF NATURAL GAS OR MIXED GAS WITHIN THE CITY OF
DUBUQUE TO THREE PERCENT (3 %)
Whereas, City of Dubuque Ordinance No. 43 -93 (City of Dubuque Code of
Ordinances Appendix C), adopted by the City Council on the 19 day of July,
1993, granted to Peoples Natural Gas Company, its successors and assigns
(hereinafter referred to collectively as the Company), nonexclusive authority for a
period of twenty -five (25) years to maintain and operate its gas distribution
system within the limits of the city of Dubuque; and
Whereas, Black Hills Energy Corporation is the successor to Peoples
Natural Gas Company; and
Whereas, Ordinance No. 43 -93 provides that the City Council may,
impose a franchise fee not to exceed three (3) percent of the gross revenue of
the Company generated from the sale of.natural and mixed gas within the city of
Dubuque; and
Whereas, Ordinance No. 59 -03 imposed a franchise fee equal to two
percent (2 %) of the gross revenue of the Company generated from the sale of
natural and mixed gas within the city of Dubuque; and
Whereas, the City Council has determined that it is in the best interests of
the City of Dubuque to increase the franchise fee to three percent (3 %).
NOW, THEREFORE, BE IT ORDAINED BY THE CITY COUNCIL OF THE
CITY OF DUBUQUE, IOWA:
Section 1 of Ordinance No. 59 -03 is amended to read as follows:
Attest:
Section 1. Effective June 1, 2010 and for the term of the
franchise granted by Ordinance No. 43 -93, there is hereby imposed upon
the Company a fee equal to three percent (3 %) of the gross revenue
generated from the sale of natural and mixed gas within the city of
Dubuque.
Passed, approved and adopted the 15 day of Febr ary, 2010.
eanne F. Schneider, City Clerk
F:\ USERS \tsteckle \Lindahl\ Ordinances \FranchiseFees BlackHillsTo3% 011410.doc
zi
Roy D /= uol, Mayor
Preparer: Barry A. Lindahl, Esq. Address: Suite 330, 300 Main Street, Dubuque, IA 52001
Telephone: (563) 583 -4113
ORDINANCE NO. 9 -10
INCREASING THE FRANCHISE FEE OF TWO PERCENT (2 %) OF THE GROSS
REVENUE OF MAQUOKETA VALLEY ELECTRIC COOPERATIVE, ITS
SUCCESSORS AND ASSIGNS, GENERATED FROM THE SALE OF ELECTRICITY
WITHIN THE CITY OF DUBUQUE TO THREE PERCENT (3 %)
Whereas, City of Dubuque Ordinance No. 20 -04, adopted by the City Council on
the 5 day of April, 2004, granted to Maquoketa Valley Electric Cooperative, its
successors and assigns (hereinafter referred to collectively as the Company),
nonexclusive authority through October 3, 2018, to maintain and operate its electrical
system within the limits of the city of Dubuque; and
Whereas, Ordinance No. 20 -04 imposed a franchise fee equal to two percent
(2 %) of the gross revenue of the Company generated from the sale of electricity within
the city of Dubuque; and
Whereas, Ordinance No. 20 -04 provided further that the City Council reserved
the right to increase or decrease the amount of such franchise fee as it determined to
be in the public interest; and
Whereas, the City Council has determined that it is in the best interests of the
City of Dubuque to increase the franchise fee to three percent (3 %).
NOW, THEREFORE, BE IT ORDAINED BY THE CITY COUNCIL OF THE CITY
OF DUBUQUE, IOWA:
Attest:
The first paragraph of Ordinance No. 20 -04 is amended to read as follows:
Section 1. Effective June 1, 2010 and for the term of the franchise,
Company shall pay to City a fee equal to three percent (3 %) of the gross revenue
generated from the sale of electricity within the city of Dubuque. City shall
provide Company with a map depicting its current corporate boundaries and shall
notify Company of any changes to the same.
Passed, approved and adopted the 15 day of Febr = ry, 2010.
Jeanne F. Schneider, CMC
City Clerk
Roy D. uol, Mayor