What is a franchise fee?
A franchise fee is like a rent the utility companies pay for being allowed to access City lands to construct, maintain and operate distribution systems. The utility companies are given the exclusive right to provide their service within city boundaries. It is very common for municipalities to have franchise agreements and to generate revenue from this type of fee. ATCO Gas and Fortis Alberta are the sole providers of natural gas and electricity within the City of Airdrie.
Franchise fees are reviewed annually by Council. In order for a municipality to increase franchise fees, a bylaw must be approved by Council. Fee increases are then effective once approved by the Alberta Utilities Commission (AUC).
Why do municipalities charge franchise fees?
Municipalities are responsible for providing the services that citizens want. An important consideration in generating funds to provide the services is 'who pays for what'. While property taxes make up the most significant portion of revenue, franchise fees are also a major source of revenue for municipalities. 78% of the 130 million dollar 2017 budget is made up of a combination of taxes, franchise fees and user fees.
Franchise fee revenue comes from a customer base which includes renters, schools, churches, and Federal and Provincial governments, which are exempt by law from paying municipal tax. By using a franchise fee to generate income from exempt community members, the burden of paying for City services is more equitable to all residents. These types of customers benefit from the service provided by utility companies and it is appropriate to garner a portion of revenue from them.
What are Airdrie's franchise fees?
Council passed a bylaw in 2015 for an increase from 12 per cent to 13 percent effective January 2016. The AUC restricts the percentage that can be charged for a franchise fee to 20% of the revenue earned by delivering electricity.
The natural gas franchise fee in Airdrie has been set at 29.6 per cent since 2007. The AUC restricts the percentage that can be charged for a franchise fee to 35% of the revenue earned by delivering natural gas.
How does Airdrie compare to other municipalities?
The chart below summarizes the municipal tax and franchise fees per capita from the 2016 audited financial statements for each benchmark community. Our city is now one of Alberta’s mid-sized cities and it is important that revenue levels grow to those of similar size.
|Airdrie||Red Deer||Lethbridge||St. Albert||Grande Prairie||Calgary|
|Population||61,842||99, 832||96, 828||64,645||68,556||1,235,171|
|Total Taxes and Fees||53,131,083||135,193,000||140,965,000||95,138,000||120,151,452||2,134,118,000|
|Municipal Tax per capita||771||1,246||1,305||1,441||1,599||1,590|
|Franchise fees per capita||88||109||151||31||153||138|
|Total per capita||859||1,354||1,456||1,472||1,753||1,728|
|Percentage above Airdrie||58%||69%||71%||104%||101%|
The gap is widening each year, as Airdrie continues to be on the extreme low end with the other communities, operating with 58% to 104% higher revenue.
The City of Airdrie is serving a population similar to St. Albert and Grande Prairie and is operating with less than half the municipal tax revenue than these municipalities.
Why are we recommending an increase to franchise fees?
The City experienced 5.37% growth in 2016 with the majority of this increase coming from residential growth. A rapid rate of growth is difficult to manage for a municipality. During the last three years there have been over 12,282 new residents added to Airdrie, which is equivalent to a town the size of Canmore or Strathmore.
Increases to franchise fees will assist with funds required to manage the shortfall, maintain services and better balance where revenue is coming from. Increasing revenue from franchise fees will contribute to keeping tax revenue increases down and provide an elastic source of revenue. This revenue source will continue to grow as population increases.
Over the next four years, City capital plans identify a new library, a fourth fire hall and a another recreational centre. Annual operational needs to put these facilities in place will be significant and add millions of dollars in the tax base. Operating revenue growth is essential to being able to provide these services to the community.
Considering the statistical information, administration is recommending that the electrical franchise fee be increased to 20% systematically over the next four years. This increase would better align the City of Airdrie with benchmark communities and work toward increasing sustainability in the future. No increase is recommended for the gas franchise fee, as the fee is already in line with similar sized communities.
What effect would an increase in franchise fees have on electricity customers?
An additional 1% Fortis franchise fee would generate $250,000 and would add $0.62 per month to the average customer bill (this does not include any potential increase to delivery charges from Fortis that would require AUC approval).