Franchise Agreements and Franchise Fees

October 15, 2006

Originally appeared in the October, 2006 edition of Between the Sessions.

Background

In Georgia, franchise fees are an important component of a diversified revenue stream for cities. In 2005 they accounted for 7.2% of all municipal revenues and were the fifth largest source of funding for municipal operations that year. Although they play an essential role in funding municipal services, franchise fees and franchise agreements, which govern the fees, are often misunderstood.

The Facts
 
What is a municipal franchise agreement?
A municipal franchise agreement is a contract between a city government and a utility company or cable provider that outlines certain requirements that must be met in order for the utility or cable provider to use the city's (public) right-of-way.

What is public right-of-way and what is it used for?
Public right-of-way is an interest in property that is held in the public's interest by cities and is used to accommodate traffic, utility and cable facilities, drainage and other similar public uses.

What is a franchise fee?
In short, franchise fees are the "rent" or "reimbursement" utility and cable providers pay for the use of the public's right-of-way.

Are franchise fees a tax?
No. Franchise fees are simply the cost utility and cable providers incur for being allowed to place their facilities in the public's right-of-way. Franchise fees are considered a cost of doing business.

What would happen if there was no access to the public right-of-way?
Utility and cable providers would have to purchase the property themselves. In the instance where utilities have eminent domain powers, the utility could condemn the property, but would still have to pay the property owner for the land. In cities, the cost to purchase the required right-of-way would be extremely expensive and would result in increased rates.

Does city and county franchising authority differ?
Yes. In Georgia cities are allowed to collect franchise fees from electric, gas, telecommunication and cable providers. Counties are limited to collecting franchise fees from cable providers only.

Why is there this difference in franchising authority between cities and counties?
Simply put, state law currently limits counties to collect franchise fees from cable providers while it allows cities the ability to collect from cable providers as well as from traditional utility providers.

Is there any reason for this difference in franchising authority?
Historically, franchise fees were intended to encourage economic development in cities. Cities were compensated for permitting denser development and attracting businesses, thereby allowing utility providers to serve more customers in a small area. Since cities had already acquired right-of-way for their own needs, it made sense for the utility companies to simply pay for the use of the right-of-way instead of trying to acquire the property on their own. In the case of placing facilities in the unincorporated county, utilities were able to purchase land or easements directly from private property owners.

Do unincorporated customers incur a penalty by having municipal franchise fees incorporated in their rates?
No. Granted, municipal franchise fees are built into the overall rate base and are partially paid for by unincorporated residents. But the reverse is also true. The significantly higher costs to serve customers in rural areas are also built into the rate base, and residents in cities pay those costs as well.

The ability of utility providers to serve residents in cities, with their greater density and thus lower cost of service, helps offset the costs incurred when providing those same services to the unincorporated county where the costs are higher.

Do cities oppose counties being granted the authority to franchise and receive franchise fees from electric, gas and telecommunication providers?
No, provided that city residents are not negatively affected.

What are the benefits to the public of franchise agreements?
Besides requiring the payment by utility and cable providers for the use and maintenance of the public right-of-way, franchise agreements designate specific, workable areas for the placement of utility and cable provider facilities. Having providers in the same area limits the amount of disruption to the general public and commercial activity when facilities need to be repaired, replaced or moved.

What are the benefits of franchise agreements to utility and cable providers?
Franchise agreements are basically contracts and make good business sense for providers in numerous ways: they provide a "roadmap" for the placement of their facilities which results in lower administrative costs; and they define the responsibilities for both the city and the provider in regards to who pays for the expansion or relocation of facilities.