Since 2005, El Paso Electric has paid $98.5 million in franchise fees to use city streets and other rights-of-way.

And even though the utility pays the fees, the funds come from customers’ pockets, and go straight to the city.

When the El Paso City Council raised the franchise fee in 2005 from 2 percent to 3.25 percent of the utility’s gross revenues – or from $8.3 million a year to $15.5 million – the extra income went to balance the city budget, and citizen’s howled that it was a hidden tax.

El Paso Electric CEO David Stevens wouldn’t disagree.

“Any franchise fee is strictly a pass-through,” he told El Paso Inc. “It’s just a hidden tax, which is fine, but you can’t say you don’t want to raise taxes and then raise the franchise fee.

“It’s one and the same to the customer.”

Typically, for-profit utilities are charged franchise fees to compensate cities for using public rights-of-way, including streets, alleys and other public land where wires and pipes run above or below ground.

Looking for funds
Stevens’ comments came in response to questions about recent statements by newly elected District 8 city Rep. Cortney Niland.

She suggested in a published interview that the city needs to raise more money outside of property taxes, and that one place to start could be hitting up El Paso Electric for another franchise fee increase.

The current 4 percent fee is low when compared with a national average of 5 percent, she said.

The last increase in the electric company’s franchise fee occurred just last year, as part of a $17.1-million rate case settlement with the city in June 2010.

Then, at the behest of the electric company itself, City Council boosted the franchise fee from 3.25 percent to 4 percent.

That will cost ratepayers an extra $3.5 million to $4 million a year and is actually part of the rate increase to be paid El Paso Electric’s Texas customers.

The franchise fee will rise along with utility revenues, even as the percentage stays the same.

Increasing it again, as Niland suggests, would require the city to open a new rate case against El Paso Electric.

Asked to explain that, Niland started by saying, “I didn’t ever propose that the franchise fee be increased.”

She said she has taken on the task at City Council of looking for ways to increase revenues for the city.

“When you want to increase and provide better services, you have to find the money,” she said. “I’m charged with looking at every single angle … for new sources of income.”

Higher profits
She said she thinks the last year’s rate settlement should be re-evaluated in light of the latest quarterly earnings of El Paso Electric, showing a 12 percent rate of return – not the 10.125 percent allowed by the settlement and approved by the Texas Public Utility Commission.

Stevens has said the higher profits for the last quarter are easily explained by the fact that summer rates went up, while winter electric rates went down.

Niland said the electric company’s commercial and industrial rates are the highest in the state and that residential rates are second highest.

If the utility’s income is higher than called for, she said, the city should consider filing a new rate case against the company to force down both rates and profits.

“I don’t want to do anything that is going to hurt the ratepayer in this study,” she said. “My goal is to evaluate what was done a year ago. … My question is should that rate increase have been allowed?”

Although Stevens has likened franchise fees to taxes paid directly to the city, last year’s suggestion that the city increase the franchise fee by 19 percent came not from City Hall but from the electric company itself.

“The idea was generated by the electric utility in lieu of getting them to do an electric incentive rate or lower industrial rate, because the electric rates make us noncompetitive,” said El Paso city manager Joyce Wilson.

“Up to now, I’ve only seen one instance where that was actually the case,” she said.

REDCo, El Paso’s Regional Economic Development Corp., which the city pays to recruit businesses and industries, fully expected to be the major beneficiary of a franchise fee increase.

REDCo’s director of operations, Ken Farah, said the electric company’s idea was that REDCo would have a better chance to attract major industries with heavy electric demands if the city could offer additional incentives to “buy down” their electric bills.

Other Texas cities collect extra sales taxes to create economic development funds and use those monies to improve a standard package of property and sales tax breaks.

No rate discount
El Paso can’t increase its sales tax rate because it devotes the last half-cent it could have used to fund Sun Metro.

“The idea came from me,” said David Carpenter, El Paso Electric’s chief financial officer, of the franchise fee increase. “We’ve had people that said they’re interested in moving a company to El Paso and are looking for a rate discount.

“We can’t really give a rate discount, so we said let’s increase the franchise fee, put it in a dedicated fund and then we’ll use that fund if a customer … needs some extra incentive to come.”

Of the extra $17.1 million going to El Paso as a result of the higher rates that are part of last year’s rate settlement, about $3.7 million is the franchise fee.

“That nets us about $13.5 million,” Carpenter said.

To REDCo’s chagrin, City Council rejected the idea of creating an economic development fund and decided to bequeath 75 percent of the increase from the franchise fee to the Medical Center of the Americas Foundation.

That 440-acre campus takes in the new Paul L. Foster School of Medicine, the Children’s Hospital now under construction, the University Medical Center and other property that is mostly in public hands.

Emma Schwartz, president of the non-profit MCA Foundation, said they’re putting the finishing touches on a business plan.

Among other things, it will call for using the franchise fee revenue stream and other income to leverage a large sum of money to develop a research park on 13 acres of city property.

El Paso Inc. reporter David Crowder can be reached at dcrowder@elpasoinc.com or by phone at (915) 534-4422, ext. 122 and (915) 630-6622.