Memorandum

City of Lawrence

City Manager’s Office

 

TO:

Diane Stoddard, Interim City Manager

FROM:

Brandon McGuire, Assistant to the City Manager

CC:

Casey Toomay, Bryan Kidney, Toni Wheeler, Charles Soules, Mark Thiel, Dave Wagner

DATE:

November 12, 2015

RE:

Ordinance 8957, Black Hills Energy Franchise Agreement

 

Background

At its October 27, 2015 meeting, the City Commission received an update on the proposed natural gas franchise ordinance for Black Hills Energy. Background and information about franchise agreements and the existing natural gas agreement are included in that October 27th update memorandum. If adopted, Updated to add new Section 7 (A) (1) and revise language in Section 7 (B) (1) in Ordinance 8957 would establish a new franchise agreement between the City and Black Hills Energy and authorize the utility to locate and operate its facilities and equipment in City-owned right of way. As discussed at the October 27th meeting, the proposed ordinance would replace the existing ordinance that took effect in 2000 and expired last year. The proposed ordinance is similar to the current ordinance with one main exception: it would establish a new method for calculating the natural gas franchise fee.

 

Franchise fees are a statutorily authorized form of compensation to the City for grant of the franchise and for the cost to acquire and maintain city right of way. Franchise fees are payments in lieu of taxes and are collected as part of electric, natural gas, cable television and wire telephone franchise agreements. In aggregate, this revenue source comprises 10 percent of General Fund resources. Natural gas franchise fee revenue collections comprise 13 percent of total franchise fee revenue. The current method of calculating gas franchise fees has not changed since 2000 when the current ordinance was adopted, and gas fee collections have remained flat during that time. Prior to 2000, the gas franchise fee was 5 percent of gross receipts.

 

Also discussed at the October 27th meeting was the fact that Lawrence calculates the gas franchise fee differently than every other city in Kansas. The current fee is calculated using a tiered rate structure based on volumetric consumption. Based on the current volumetric rate, gas fee collections are only affected by consumption. The result is that neither the City or the citizens and businesses of Lawrence benefit from changes in the commodities market. All other cities in Kansas calculate the gas franchise fee as a percent on the utility’s gross receipts plus a volumetric rate for transport/wholesale customers. The proposed ordinance would establish the same rate structure by assessing a 3.0 percent fee on gross receipts for all customers plus a tiered volumetric rate for transport/wholesale customers.

 

The proposed fee was developed with two key principles in mind: 1) the new fee should produce revenue that is reactive to market factors, and 2) implementation of the new fee should, essentially, have a neutral immediate impact on revenue. The proposed fee accomplishes the two objectives and has received support from the utility’s two largest commercial customers.

 

The attached table demonstrates the estimated impact of the proposed franchise fee if it were implemented January 1, 2016. As the ordinance is written, the new fee would actually take effect with the first billing cycle of July, 2016. As demonstrated in the table, the estimated impact on revenue is $36,000 if the fee were implemented at the beginning of 2016. The average monthly residential bill is estimated to increase around $0.06, or 3.51 percent. The largest estimated increases would fall on a few large volume customers who purchase their gas directly from the utility. These estimates are based on previous years’ averages and current knowledge of the future gas commodities market. The impact analysis shared at the October 27th Commission meeting was based on the same data except the 2015 NYMEX average futures settlement was used (Oct. 27th Estimated Impact Analysis). The updated analysis uses 2016 NYMEX (New York Mercantile Exchange) futures settlements. The difference between the two tables demonstrates how revenue would react to market factors under the proposed method of calculation. If the proposed fee were effective at the beginning of 2015, then customers would be expected to experience lower fees in 2016 compared to 2015. 

 

Recommendation

The current Black Hills Energy franchise agreement has expired and a new agreement is needed. Staff developed Ordinance No. 8957 which assigns Black Hills Energy a non-exclusive franchise and the right to construct, use and maintain natural gas service lines in the public right of way. The terms and conditions of the proposed franchise agreement are substantially the same as the existing agreement with one exception. The proposed agreement includes a new method for calculating the natural gas franchise fee. The proposed fee structure was developed based on best practices utilized by most Kansas cities and it is designed to produce revenue that reacts to market factors. Staff recommends approving the proposed franchise agreement with Black Hills Energy by adopting Ordinance No. 8957.

 

Recommended Action

Adopt Ordinance No. 8957, granting Black Hills Energy a non-exclusive natural gas franchise and the right and privilege to construct, use and maintain natural gas service lines in City-owned right of way.