What to Know About Utility Franchise Agreements and Fees

By Trisha Duncan

Minnesota energy service providers have a statutory obligation to provide safe, adequate, and efficient electric and natural gas service to the public at just and reasonable rates.

To assist with this obligation, state law allows utilities to use public rights-of-way subject to reasonable regulation. These access points are used to locate electric and gas infrastructure, and typically include public roads, highways, streets, bike lanes, and sidewalks. Local governments are responsible for reasonable management of the rights-of-way under their jurisdiction.

Utility franchise agreements

A franchise agreement sets expectations between a city and a utility company, including how it constructs, operates, and maintains equipment located in public grounds and rights-of-way. Franchise agreements can also address services like tree trimming and roadway restoration when a utility project is complete. In addition to the conditions in franchise agreements, cities may require utilities to obtain permits for work within the right-of-way. Franchise agreements do not determine energy goals, the mix of energy resources used by a utility, energy prices, or service standards. The Minnesota Legislature makes those policy decisions, which are regulated by the Minnesota Public Utilities Commission (PUC).

Benefits of franchise agreements

Franchise agreements enhance strong working relationships between utilities and the communities they serve by providing clear expectations, while supporting consistent and efficient operations and service.

Utility franchise fees

Some cities choose to establish a franchise fee as part of their franchise agreement. The fee is established in cooperation with the utility and typically executed through a separate ordinance, which can be implemented at any time during the life of the franchise agreement if the parties agree on the terms.

As allowed by the PUC, franchise fees levied on utilities are passed directly to customers and itemized on their bills as a city fee. The utility collects the fee and remits it to the city.

A franchise fee can only be implemented if it is allowed by the city’s existing franchise agreement. If a community determines a franchise fee is appropriate, it can negotiate various points with the utilities. For example:

• Franchise fees are set forth in a fee ordinance authorized by, but separate from, the franchise agreement.
• An equivalent fee is placed on all energy suppliers serving the city.
• The utility is not subject to permit fees while franchise fees are in effect.
• The utility prepares fee schedule options to collect the total amount of revenue sought by the city.
• A flat fee per premise is applied equally for all customers in a given rate class.
• Fees are paid to the city quarterly.

Franchise fee considerations

As in any case where a city is considering a new revenue source, utilities urge careful consideration of the possible negative impacts of a franchise fee since they increase the cost of energy for all customers in that city.

Timeline

Implementing franchise fees is a complex process requiring adequate time for system programming and testing. The franchise agreement contains certain timelines the parties adhere to. Here’s a typical sequence of events:

• The city provides the utility with written notice of intent to enact a fee prior to formal consideration.
• The city negotiates the fee with the utility.
• In order to meet the PUC’s requirements, the approved fee ordinance must be received by the utility at least 90 days before the anticipated start of fee collection.
• The utility collects the fee from its customers monthly, and transfers it to the city on a quarterly basis.

To learn more about franchise agreements and fees, contact the energy utilities that serve your municipality.

Trisha Duncan is the director of Minnesota community relations at Xcel Energy (mn.my.xcelenergy.com). Xcel Energy is a member of the League’s Business Leadership Council (lmc.org/sponsors).