Gas & Electric Franchise Fee
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MEMORANDUM
May 31,2006
TO:
The Honorable Mayor and City Council Members
FROM:
Michael C. Van Milligen, City Manager
SUBJECT: Utility Franchise Fee
On May 26, 2006, I issued a media release stating that, "The Iowa Supreme Court
today ruled that cities' assessment of franchise fees is an illegal tax." On May 27,2006,
this information was accurately reported by the media.
Now that City Attorney Barry Lindahl has had time to review the Iowa Supreme Court
Decision, it appears my media release was not completely accurate. As Barry reports,
"The Court did not hold that franchise fees are illegal." The Iowa Supreme Court
opinion says that franchise fees are allowed, but the fee must be "reasonably related to
the reasonable costs of inspecting, licensing, supervising or otherwise regulating the
activity that is being franchised."
Barry recommends that the next step for the City of Dubuque is to do what the Supreme
Court ordered the Trial Court to do in Des Moines, "Determine what, if any, part of the
franchise fees are related to the City's administrative expenses in exercising its police
power, including the costs associated with any incidental consequences of the franchise
services."
Three firms have been contacted that provide analysis of the administrative expenses in
administering a utility franchise. The cost estimate for such a study is $50,000 to
$100,000. The funding for this study would come from the $289,000 available in the
Eagle Point Rock Bluff Stabilization Capital Improvement Program budgeted item.
I respectfully recommend that the Mayor and City Council authorize the issuance of a
Request for Proposals to select a consultant to do this analysis and continue to collect
the 2% fee. I have a reasonable expectation that the City's 2% Utility Franchise Fee will
reflect the administrative expenses. If the administrative expenses do not meet or
exceed the 2% fee, a decision will need to be made about the future of the fee with the
possible options to reduce or eliminate the fee. Any reduction in revenue in Fiscal Year
2007 would be covered by canceling some capital improvement projects, with the long
term impact of a reduction in revenues handled through the Fiscal Year 2008 budget
process
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Michael C. Van Milligen
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Attachment
cc: Barry Lindahl, Corporation Counsel
Cindy Steinhauser, Assistant City Manager
BAR R Y A. L I N D A H L, ESQ.
CORPORATION COUNSEL, CITY OF DUBUQUE
MEMO
To:
Michael C. Van Milligen
City Manager
DATE:
May 31,2006
RE:
Gas & Electric Franchise Fees
I have now had an opportunity to look more closely at the Iowa Supreme Court opinion
in Kragnes vs. City of Des Moines and I wanted to emphasize key parts of the opinion.
1. Cities are authorized to charQe a franchise fee. The Court did not hold that
franchise fees are illegal. The opinion states "We agree with the City that the
implementation of home rule and the Home Rule for Cities bill does authorize the
City to charge a franchise fee."
2. A city is authorized to assess a franchise fee based on a percentaQe of the
Qross revenues derived from the utility's sale of its services to the public.
The Supreme Court did not hold that a franchise fee based on gross receipts
from sales is illegal. The Court held 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."
3. The real issue involved in the case was stated by the Supreme Court as follows:
On what basis may a city assess a franchise fee to a private utility?
The Court held that a franchise fee must be "reasonably related to the
reasonable costs of inspecting, licensing, supervising, or otherwise regulating the
activity that is being franchised." The opinion, quoting from an earlier Iowa
Supreme Court case, also states:
... but the limitation of the license fee to the necessary expenses
will still leave a considerable field for the exercise of discretion
when the amount of the fee is to be determined.... in fixina UDon
the fee. it is DroDer and reasonable to take into account. not the
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expense merely of direct requlation. but all the incidental
consequences that may be likely to subiect the public to cost in
consequence of the business licensed. In some cases. the
incidental consequences are much the most important. and.
indeed. are principally had in view when the fee is decided
upon. . .. (Emphasis added)
The Court in Kragnes emphasized the significance of the "incidental consequences"
language further, providing that upon remand to the District Court, "At trial, the district
court shall determine what, if any, part of the franchise fees are related to the City's
administrative expenses in exercising its police power, includinq the costs associated
with any incidental consequences of the franchised services." (Emphasis added)
The Court also emphasized in Kragnes that its holding "does not require the city to
calculate its administrative expenses to a mathematical certainty" as long as the fee is
reasonably designed to defray the costs of the particular service rendered by the
municipality.
I would recommend that the next step for the City of Dubuque is to do exactly what the
Supreme Court ordered the Trial Court to do in Kragnes: "Determine what, if any, part
of the franchise fees are related to the City's administrative expenses in exercising its
police power, including the costs associated with any incidental consequences of the
franchise services."
SAUls