What’s a franchise fee?

Scott Neal, August 17, 2012 | Posted in Scott Neal

At the City Council’s August 6 meeting, the Council approved the first reading of two new ordinances that will create two new franchise fees:  one for customers of Xcel Energy, which sells electricity in Edina, and one of customers of CenterPoint Energy, which sells natural gas in Edina.

I’m not sure how well it’s known, but cable television subscribers have been paying a franchise fee for years. The cable television franchise fee is like a sales tax in that it is 5% of the monthly bill.  The new utility franchise fee is like a sales tax in that it will be a small charge listed on the monthly bill that customers receive from each utility, but its unlike a sales tax in thatit is a flat amount each month that is tied to the type of customer you are, not how much electricity or natural gas you consume.

For a typical residential customer of Xcel Energy, the new monthly franchise fee is $1.45 per month.  It’s exactly the same for the typical residential customer of CenterPoint Energy.   The franchise fees for other classes of customer (small business, large business, etc.) are higher than $1.45 per month, but not by much.  When the new franchise fees are fully phased in early 2013, I expect them to generate about $1.1 million  per year in new revenue for the City.

So, you might be wondering, what do Edina residents and businesses get out of this?

In response to parents, grandparents, walkers, runners and bikers in the community, the City Council wants to increase the size and improve the condition of the City’s network of sidewalks, bike trails and other pedestrian-related improvements.  They want to accomplish this goal because they believe it is the right thing to do for the future of Edina.

This goal will require resources to complete.  After looking at a number of different ways to fund this goal, the Council and I settled on the utility franchise fee as our best option.  Why?  It has a wide base.  Everyone in the community (including non-property tax paying properties) uses electricty and natural gas, so everyone will pay the franchise fee.  Because the base of people paying this fee is wide, the rate of the fee itself can be low.  That’s how a $2.90/month/residence franchise fee can generate over $1 million a year in revenues.

The plan for these new fees is to account for them in a separate fund in our accounting system that will not be combined with our General Fund.  The money is this spearate fund will be used only for the purposes outlined in the new ordinances.  We will adopt an annual plan for how the money will be spent and staff will report to Council annually on how the money was spent.

The next step for the two new ordinances is for the Council to consider them again on October 16.  If the Council approves them that night, they will stand approved and will be implemented sometime during the first quarter of 2013.