Franchise Fee

**THESE RATES ARE DRAFT AND SUBJECT TO CHANGE DURING THE PUBLIC HEARING PROCESS.  CITY COUNCIL IS CONSIDERING ALL FEE OPTIONS RELATED TO THIS MATTER.**

Challenge:
The city wishes to identify a long-term funding solution to continue with annual street repair.

History:
The city was established in 1957 but the greatest growth occurred in the 1980's and 1990's; 30-40 years ago.

Current Practice:
City growth has slowed and the city's infrastructure has aged. The city had to identify other resources to fund city streets. City streets were traditionally paid for by tax levy, but City Council soon began to utilize savings and pooled TIF resources in an effort to maintain lower levy increases over the years. With other capital projects spending down savings, the city was left with the pooled TIF funding source or raising the levy significantly. Two years ago, the city levied $50,000 for city streets, but not for the upcoming 2018 budget.

City Street Program & Costs:
Street repair needs and costs continue to rise. The city has 36 miles of streets with a majority of them constructed in the 1980's and 1990's. With an expected life of 30 years, the city should be repairing about 1.2 miles per year AT A MINIMUM. Current repair rate is 75% of ideal rate of repair. 

Year
Assessed Cost
City Cost
Total Project Cost
Length Improved
2011
$96,000
$95,000
$191,000
3,631 feet = 0.68 miles
2012
$145,000
$180,000
$325,000
5,000 feet = 0.94 miles
2013
$175,800
$224,000
$399,800
6,250 feet = 1.18 miles
2014
$221,500
$322,700
$544,200
5,500 feet = 1.04 miles
2015
$260,000
$335,000
$595,000
3,100 feet = 0.59 miles
2016
$250,000
$230,000
$480,000
4,330 feet = 0.82 miles
2017
$283,000
$352,800
$635,800
5,117 feet = 0.97 miles

Pooled TIF:
Pooled TIF dollars should be invested in projects to revitalize our community. Some would argue that maintaining city streets helps to maintain the vitality of the community. Others believe these dollars could have greater impact on the tax base if they assisted the business community in reinvesting in our city or attracting new businesses to Vadnais Heights. Currently, there is between $2-3M left in this fund balance. City staff estimates between 5-6 years are left before these dollars are exhausted, if spent at the current rate.

What is a Franchise Fee?
Under Minnesota Statute (216B.36), cities can impose a fee on utility companies that use the public rights-of-way to deliver service. The city can determine the amount, structure, and use of franchise fees. Generally, they are structured in two ways: a flat rate per utility account OR a percentage of consumption used by each utility account. The city is recommending the "flat rate" fee, rather than one based on consumption - which would vary each month. Xcel and Connexus have not opposed our effort to implement this fee as they consider these fees a local government decision.

Why Franchise Fees?
Franchise fees help cities cover increasing costs of providing important services - such as maintaining aging facilities and infrastructure - without raising property taxes. These fees are also more equally distributed than property taxes, and would be paid by ALL utility customers - even those who do not currently pay property taxes. These fees will be dedicated to street maintenance and segregated into a separate fund.

What are the Benefits of Franchise Fees?
When comparing franchise fees as a revenue sources to property taxes, some advances include:

  • Cover a wider base than property taxes
  • Will diversify the city's revenue sources
  • Reliable sources of revenue
  • A flat-rate franchise fee would be the same for each property, making it easy to administer
  • Likely change in policy to reduce assessment rate for commercial properties, currently at 100% assessed, versus residential, which is assessed at 50% of repair costs.

Other Like Cities that have Franchise Fees:
Many cities in the State of Minnesota have franchise fees. Xcel has over 70 cities with some type of franchise fees. Connexus has 11 franchise fees with cities in their service area. Some near us include White Bear Lake, Shoreview, Little Canada, Maplewood, and New Brighton.

Proposed Fee and Customer Breakdown

Customer Class (Electric)
Proposed Fee (per month)
Connexus* Breakdown
Xcel Breakdown
Residential
$2
95%
86%
Small C&I: Non-Demand
$3
5% for all small
12% for all small
Small C&I: Demand
$13
--
--
Large C&I
$60
0%
1%
Government
$0
--
--
Street Lighting
$0
--
--
Irrigation
$0
--
--
*Reminder Connexus only provides electric to Vadnais Heights. Xcel provides both electric and gas within city limits
Customer Class (gas)
Proposed Fee (per month)
Xcel Breakdown
Residential
 $1.25
93%
Commercial Firm: Non-Demand
$3.50
7% for all Commercial
Commercial Firm: Demand
$30
--
Small Interruptible
$0
--
Medium & Large Interruptible
$60
--
Firm Transportation
$0
--
Interruptible Transportation
$0
--
Proposed rate would accrue about $296,790, approximately our current street funding allotment.
Property Type
Connexus Electric
Xcel Electric
Xcel Gas
Total
Residential
$51,000
$78,840
$75,300
$205,140
Commercial
$9,000
$64,704
$17,946
$91,650
Total
$60,000
$143,544
$93,246
$296,790

At the November 1, 2017 City Council meeting, the City Council will be considering a policy amendment to current assessment policy that would reduce the commercial obligation from 100% paid by property owners, to 50% paid by property owners and the city.

Proportionate:
Xcel and Connexus request businesses and residents pay the same proportion for their overall bill. The city will oblige this request. Exhibit below details that percent revenue which is an effective comparison for the portion of the overall bill. Xcel and Connexus have different billing models and this explains the difference in percentages in order to charge the same fixed rate for like customers.


Connexus ElectricXcel ElectricXcel Gas
Percentage of Revenue1.6%1.6%2.3%

Before Street Project

Before 2017 street project

After Street Project

After 2017 street project