At its Sept. 6 meeting, the City Council approved establishing franchise fees on utilities (gas and electric) to help offset future property tax/special assessment increases.
Currently, three electric utilities (Shakopee Public Utilities, Xcel Energy and Minnesota Valley Electric Cooperative) and two gas utilities (CenterPoint Energy and Xcel) operate in Shakopee.
The City Council approved a 3-percent franchise fee with Minnesota Valley Electric Cooperative, Xcel Energy and CenterPoint Energy. The fee includes a circuit breaker maximum for Xcel's mega-users. SPU will continue to collect its payment in lieu of taxes.
Utilities may pass the fees onto their customers. Fee collection begins Jan. 1, 2017.
Per state law, a city may impose a franchise fee on a gas or electric utility for the use of the public right-of-way by adopting an ordinance that establishes fee terms, including structure, collection, schedule and effective dates. Cities have the sole authority to determine the amount, structure and use of utility franchise fees.
There is no cap on the fee rate and the fees can be used for any public purpose. Many communities do opt to dedicate the franchise fees for a specific purpose including capital improvements, such as pavement management, road maintenance, sidewalks or trails.
Cities have the option of imposing a flat fee (e.g., $3 per month) or a percentage fee (e.g., 3 percent) based on utility usage. These fees can vary between residential customers and various commercial customer types. While a flat fee is constant from month-to-month, a percentage fee varies with the season. However, with flat fees, smaller utility users (e.g., most residential and small business customers) pay a higher fee as a percentage of their total bill compared to large consumption users. Thus, a percentage fee provides a more equitable fee across all users.
What is a franchise fee?
Under Minnesota Statute 216B.36, cities can impose a fee on utility companies that use the public right-of-way to deliver service. The city can determine the amount, structure and use of franchise fees.
Franchise fees are generally structured in one of two ways:
- A flat rate per utility account
- A percentage of consumption used by each utility account
Whether a city elects to establish either a flat rate or percentage rate franchise fee, a common practice is to identify types or classes of use. Essentially, the franchise fee would distinguish between types of users (e.g., residential, commercial/industrial or based on demand. Cities typically work closely with the utility provider to define demand and non-demand use based on formulas that the utility provider has in place. This method generally recognizes that different property types (residential, commercial, etc.) use energy differently.
What does this mean for residents?
Utility companies have the right to pass franchise fees on to their customers. If implemented, utility customers would likely see an increase on their gas and electric bills and a separate line item noted as a “city fee.” The utility companies would collect the franchise fees and remit them to the city.
Why implement a franchise fee?
Utilities use public right-of-ways to deliver services to residents and business. Utility franchise fees help cities cover increasing costs of providing important services, such as maintaining aging facilities and infrastructure, without raising property taxes. Many cities in Minnesota already have franchise fees in place.
Utility franchise fees would apply to all utility customers in the city regardless of whether they pay property taxes. This includes non-profit organizations, schools, churches and government customers. Thus, these fees are more equally distributed than property taxes.
Cable franchise fees
The City of Shakopee already utilizes franchise fees for cable franchise providers, such as Comcast. (The city is currently negotiating fees with CenturyLink, as a new cable franchise provider.) These fees go directly into the city's general fund.
What other cities collect utility franchise fees?
As of 2014, there were 101 cities in the seven-county metro area that collected utility franchise fees and 357 in the state as a whole.
Other metropolitan cities collecting utility franchise fees include Brooklyn Center, Burnsville, Chaska, Cottage Grove, Deephaven, Excelsior, Golden Valley, Hopkins, Little Canada, Maplewood, Minneapolis, Mounds View, New Brighton, New Hope, Osseo, Prior Lake, Richfield, Robbinsdale, Rogers, Shoreview, South St. Paul, Spring Lake Park, St. Paul and Stillwater.
What are the pros and cons of utility franchise fees?When comparing franchise fees as a revenue sources to property taxes, some advantages include:
- Cover a wider base than property taxes
- Will diversify the City’s revenue sources
- A flat-rate franchise fee would be the same for each property, making it easy to administer
- New construction would contribute immediately, which would eliminate the one to two-year lag for the City to receive property taxes for property owners receiving municipal services
- Everyone must pay since gas and electricity are needed. This is unlike a cable franchise fee where only subscribers choosing to receive the service are subject to paying the fee
- A flat-rate franchise fee would be the same for all homes, regardless of their value