2021-060 Franchise Fees and Return on InvestmentDate: August 13, 2021 Report No. 2021-060
INFORMAL STAFF REPORT
TO MAYOR AND CITY COUNCIL
SUBJECT:
Franchise Fees and Return on Investment Information
BACKGROUND:
On Aug. 10, 2021, several Council members requested additional information regarding franchise
fees and return on investment (ROI).
DISCUSSION:
Franchise Fees
The calculation of franchise fees paid to the City for the use and occupancy of public rights-of-
way by investor-owned utilities and electric/gas cooperatives are governed by State Law, City
Charter/Code provisions, and the language in formal franchise agreements. However, the same is
not true for municipally-owned utilities, which are governed by the Public Utility Commission
(PUC) of Texas, Public Utilities Board (PUB) and City Council.
Investor-Owned Utilities
There are numerous investor owned utilities operating in the City. Cable TV operators pay 5% of
revenues, Telephone operators pay a rate per telephone line that is adjusted for CIP annually,
natural gas utilities pay 5% of revenues, and electric utilities pay 4-5% of revenues.
Municipally-Owned Utilities
Currently, the Water, Wastewater and Electric utilities pay a franchise fee to the General Fund
which is administered by the City. To be in line with investor-owned utilities and to adequately
compensate the General Fund for use of city space and right-of-way, the municipally-owned
utilities franchise fees are set at 5% of gross revenues. The Drainage Department, beginning in FY
2004-05, is exempt from franchise fees.
Due to the complexity of the Water, Wastewater and Electric fund and the variation of how other
entities (public and private) calculate franchise fees for their respective cities, not all revenues are
included in the calculation of franchise. All revenue categories in the Solid Waste fund are used in
the calculation of a franchise fee which equals 5% of gross revenues. As new revenue streams are
identified and before new revenue codes are created in the City’s financial system, the Director of
Finance will consult with appropriate Manager or Director whether or not such new revenue should
be included in the calculation of franchise fees. Creating a new revenue code to segregate existing
revenue streams will not be justification to exempt such revenue from this calculation.
Return on Investment
The Return on Investment (ROI) is intended to provide a monetary benefit to the General Fund for
owning and operating municipally owned utilities. Currently, the Electric, Water and Wastewater
Utilities pay the following ROI to the General Fund.
Date: August 13, 2021 Report No. 2021-060
Electric – 6% (returns to 3.5% in FY 2022-23)
• Water – 3.5%
• Wastewater – 3.5%
On April 21, 2020, the City Council approved an increase in the ROI for the Electric Fund from
3.5% to 6%. The increased ROI will be for the remainder of FY 2020-21 and FY 2021-22 at
which point it will decrease to 3.5%. It is important to note that Electric’s Energy Cost
Adjustment (ECA) revenue is capped at 3.0 cents per kWh, and revenues associated with the
Denton Energy Center are excluded from the calculation. The ROI calculation for each Utility
varies by revenue category. However, the calculation for each Utility is primarily based on the
following three categories.
1. Residential Rate Revenue
2. Commercial Rate Revenue
3. Wholesale Rate Revenue (Water, Wastewater)
4. Other Revenue (Transmission Cost of Service Revenue)
Increasing the ROI percentage will generate more revenue for the General Fund. General Fund
revenues can be used for a variety of expenses and do not have as many restrictions as other sources
of funding. Increasing the ROI percentage would most likely lead to increases for utility rate
payers. Increasing the ROI percentage versus increasing property taxes could pose potential cost
inequity because property owners who pay property taxes to the General Fund may not also use
municipally-owned utilities. For example, there are three other electric operators in Denton and
some property owners utilize well water and/or septic systems instead of Denton Utilities. If a
property owner falls into one of those categories, they would not see additional costs of utility rate
increases but would see the benefit of the revenue into General Fund.
Changes to the ROI percentage are at the discretion of City Council. The City Charter states “the
city shall be entitled to receive annually on the net investment from excess revenues, if any, not
more than six (6) percent of the net investment.” As stated previously, the Electric Fund is currently
at 6% ROI through FY2022 at which time, the ROI percentage for Electric will revert to 3.5%.
Any change to the ROI percentage would require adoption of an ordinance formalizing the change.
STAFF CONTACT:
Cassey Ogden
Director of Finance
Cassandra.Ogden@cityofdenton.com
REQUESTOR:
Council Member Armintor
Council Member Byrd
Council Member Davis
Council Member Maguire
Date: August 13, 2021 Report No. 2021-060
PARTICIPATING DEPARTMENTS:
Finance
STAFF TIME TO COMPLETE REPORT:
Staff – 3 hours
ATTACHMENTS
Attachment 1 – Ordinance 20-875
Attachment 1