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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