Minnesota Public Utilities Commission Staff Briefing Papers

Transcription

1 Minnesota Public Utilities Commission Staff Briefing Papers Meeting Date: October 6, Agenda Item # _**3 Company: Docket No(s). Issue(s): Minnesota Power E015/M In the Matter of a Petition by Minnesota Power for Approval of a Rider for Facilities Franchise Fee 1) Does the Commission have the authority to determine how Minnesota Power will pass franchise fees through to its ratepayers? 2) If the Commission does have the authority, should the Commission approve Minnesota Power s Rider for Facilities Franchise Fees? Staff: Michelle Rebholz Janet Gonzalez Relevant Documents Minnesota Power, Initial Filing... August 5, 2011 City of Cohasset, Reply Comments and Objection... August 31, 2011 Department of Commerce, Comments... September 6, 2011 Minnesota Power, Reply Comments... September 16, 2011 Minnesota Power, Supplemental Information... September 23, 2011 City of Cohasset, Supplemental Reply Comments... September 28, 2011 The attached materials are workpapers of the Commission Staff. They are intended for use by the Public Utilities Commission and are based upon information already in the record unless otherwise noted. 88# This document can be made available in alternative formats (i.e., large print or audio tape) by calling (651) (voice). Persons with hearing or speech disabilities may call us through Minnesota Relay at or by dialing 711.

2 Staff Briefing Papers for Docket # E015/M on October 6,2011 Page 1 Statement of the Issue 1) Does the Commission have the authority to determine how Minnesota Power will pass franchise fees through to its ratepayers? 2) If the Commission does have the authority, should the Commission approve Minnesota Power s proposed Rider for Facilities Franchise Fees? Background On September 17, 2008, the Commission issued a pipeline route permit to Minnesota Power to construct a natural gas pipeline in Docket Number E015/GP The purpose of the pipeline was to provider a cleaner ignition source for the Boswell Energy Center, MP s coal fired plant in Cohasset. The four units at the Boswell Energy Center have a total capacity of more than 1,000 MW. Minnesota Statutes 216B.36 governs a municipality s authority to assess franchise fees on public utilities. A copy is provided as an Attachment to these briefing papers. Litigation between the city of Cohasset ( City or Cohasset ) and Minnesota Power ( MP ) about whether Cohasset could require a franchise of MP for the natural gas pipeline led to a Minnesota Supreme Court decision clarifying that the City could require a franchise 2. Minnesota Power s Initial Filing On August 5, 2011, Minnesota Power filed a Petition for Approval of Rider for Facilities Franchise Fee. MP explained that as an electric utility, it has electric franchise agreements in place with a number of municipalities in its service territory. Typically, when MP enters into a franchise agreement, the municipality that is the party to the agreement grants MP the right to construct, operate, and maintain poles, wires, and other equipment necessary for transmitting and distributing electricity to retail customers within the municipality. In addition, some of those municipalities want MP to pay a franchise fee; however, in every case to date MP has passed through those franchise fees it pays to the retail customers residing in that municipality. For example, in the City of Little Falls, all MP residential electric customers pay an additional $1.00 per month on their electric bills. The imposition of a franchise fee is authorized under Minn. Stat. 216B.36. In September of 2008, the City of Cohasset enacted an ordinance requiring operators of certain natural gas pipelines to be subject to a franchise and to pay a franchise fee of 1 percent of total gas usage of the pipeline. The ordinance applies to a gas pipeline constructed by MP to serve its 1 A copy of the Commission s September 17, 2008 Route Permit order is Attachment C to Cohasset s 8/31/2011Comments. 2 A copy of the Supreme Court decision is provided in Exhibit B of MP s Initial Petition and as Attachment A to Cohasset s Comments.

3 Staff Briefing Papers for Docket # E015/M on October 6,2011 Page 2 Boswell Energy Center. A series of court actions resulted in a June 1, 2011 Minnesota Supreme Court decision concluding that MP was subject to the City of Cohasset s franchise authority. MP noted that Minn. Stats and 301B.01 do not address how public utilities may allocate franchise fees among ratepayers, but cited to a Minnesota court of appeals decision noting that a utility could file a request with this Commission regarding which group of ratepayers should pay for the costs of undergrounding. In addition, MP cited to a Commission decision stating that the costs of undergrounding required by a city should be passed onto the residents of the city that required the undergrounding. MP then cited to a California appellate court decision, two Illinois decisions, and an Iowa Supreme Court decision, each of which noted that it was normal and reasonable for franchise fees to be passed through only to the customers of the municipality that imposed them. MP also cited to three appellate decisions in other states finding likewise on telephone fees. MP noted that at least two state courts found the opposite, in Washington and Colorado. MP concluded this section of its filing by stating that its proposed Rider would pass through franchise fees to residents of the city that imposed it, which is consistent with past Commission decisions and is sound public policy. MP then stated that it would also comply with the Commission s other requirements set out in its March 2011 Order on franchise fees: it would provide appropriate notice to affected customers, pass along 100% of the fee to the municipality, will have the franchise fee listed as a separate line item on its bill. Comments City of Cohasset Comments and an objection were first filed by the City of Cohasset on August 31, Cohasset stated that MP seeks to embroil the Commission in a dispute which has been in litigation for three years, which in June of 2011 resulted in a unanimous Supreme Court decision in the City of Cohasset s favor, and which will be heard by the District Court on remand on October 31, According to Cohasset, MP s petition is an attempt to persuade an administrative agency to overrule a unanimous decision of the Minnesota Supreme Court. Apart from being an improper end run around pending judicial proceedings, the petition is nonsensical and should be denied. At a minimum, the Commission should stay all proceedings pending a decision by the District court. Cohasset stated that MP is a public utility that, over Cohasset s objections and without obtaining a franchise, built a high pressure natural gas pipeline through Cohasset and across three public streets. The purpose of the pipeline was not to benefit Cohasset residents in particular, but to supply natural gas to its coal-fired electrical plant. The ultimate beneficiaries are the 141,000 electric customers of MP who receive electricity from the plant, not simply the 400 customers that live in Cohasset.

4 Staff Briefing Papers for Docket # E015/M on October 6,2011 Page 3 On June 1, a unanimous Minnesota Supreme Court held that Cohasset could require MP to obtain a franchise or permit to operate a natural gas pipeline within Cohasset s borders. Consistent with the mandate of the Supreme Court, Cohasset has scheduled a hearing on October 31, 2011 to permanently enjoin operation of the pipeline absent an executed franchise agreement acceptable to Cohasset. Rather than allow the parties and the court to sort out these issues, Minnesota Power seeks to persuade the MPUC to reach out and decide the controversy for itself. Although Cohasset has issued no franchise to MP, Minnesota Power seeks to obtain both a franchise and franchise rider from the Commission. In essence, MP wishes to recover any franchise costs by billing only Cohasset residents as opposed to the 141,000 MP customers that benefit from the pipeline. Cohasset s position is that an acceptable franchise is one that would enable the City to fund the costs that the pipeline causes Cohasset for the benefit of all 141,000 MP customers including fire protection, emergency first response, and police protection. Cohasset can recover these costs through a franchise agreement and franchise fee. It would be unfair to pass all of those costs back to Cohasset customers as opposed to spreading them equally amongst all 141,000 MP customers who benefit equally from the pipeline. This can be done in the precise fashion that MP suggested to the Supreme Court: building the franchise fee, as well as other pipeline costs, into overall rate basis. But this issue is not ripe for Commission action. MP must first be subject to a franchise before any discussion of franchise fees and how to allocate those fees to customers can occur. The District Court will address the very issue of requiring a franchise a necessary first step. Accordingly, the Commission should either deny MP s petition as improper, or at a minimum, stay the proceedings pending a decision by the District Court. MP seeks to add a rider to a non-existent franchise. No franchise has been issued to MP; it does not even have an electrical franchise. It is about to be enjoined from even operating a pipeline because it refuses to execute a franchise agreement acceptable to Cohasset. Rather than write the franchise for MP and issue it over the objections of Cohasset, the MPUC should deny this petition as out of order. The rider is fundamentally wrong because it seeks to charge all of the franchise cost of the pipeline to only 400 of the 141,000 electrical customers who benefit from the pipeline. MP s citation to NSP v. City of Oakdale, 588 N.W.2d 534 (Minn. App. 1999) is inapposite. There, the city-required work on the infrastructure at issue there the burying of power lines did not benefit any person outside of the city. It was fair to charge the cost of that structure back to the city ratepayers benefiting from the infrastructure, which is what was approved by the MPUC in Docket E002/M (Sept 21, 2001). Here, by contrast, the pipeline is used to generate electricity for 141,000 MP customers system-wide. The ratepayers benefitting from the pipeline live inside and outside Cohasset. Unlike the power lines in Oakdale, the pipeline entails costs properly chargeable to all utility customers throughout the state via system-wide rates. The City of Cohasset also attached the Minnesota Supreme Court s June 1, 2011 decision, MP s brief to the Supreme Court in that case, the Commission s Route Permit Issued to MP for

5 Staff Briefing Papers for Docket # E015/M on October 6,2011 Page 4 construction of the pipeline, and the Commission s decision in Docket E104,262/SA Department of Commerce The Department summarized the events leading to the pipeline and franchise dispute and then discussed the following issues: 1) whether it is appropriate to collect the City of Cohasset franchise fee from MP s customers within the City or from all of MP s customers; 2) the proposed tariff language; 3) the proposed notice language, and 4) the effective date. The Department agreed with MP that it was appropriate to assess the Company s customers residing in the City of Cohasset the City-imposed franchise fee rather than to assess all of MP s ratepayers. The City s franchise fee is unusual in that it results from MP s ownership of a natural gas pipeline and will be collected from electric service customers. Arguably, since the pipeline supports a large electric generating facility which serves many communities, the City s fee could be considered an operating expense. The Department then stated: However, the underlying purpose of the franchise fee itself, to offset the City s costs for providing emergency first response, fire, and police protection, benefits the city of Cohasset, in terms of supplementing its operating budget, rather than all of MP s customers. As a result, the customers who are specifically affected are those who would otherwise pay for the City s costs, namely those who reside in the City. This purpose is what helps distinguish the fee as a franchise fee. The Department then cited to Minn. Stat. 216B.36, the statute authorizing franchise fees, which states in part: the utility may be obligated by any municipality to pay to the municipality fees to raise revenue or defray increased municipal costs accruing as a result of utility operations, or both. The Department further stated: The Minnesota Supreme Court s conclusion that MP is subject to the City of Cohasset s statutory franchise authority confirms this is franchise fee rather than a general cost of operation. The Commission has consistently granted utility requests to collect franchise fees from the customers located within the city imposing the franchise fee. The Department s knowledge, the Commission has never required a utility to collect a city franchise fee from customers located outside the city limits. The Department concluded that MP s tariff language needed to be amended, because MP included only generic tariff language that did not identify the municipality imposing the franchise fee. The Department stated that MP s request for approval of a generic franchise fee rider is not consistent with the transparency sought by the Commission in its March 23, 2011

6 Staff Briefing Papers for Docket # E015/M on October 6,2011 Page 5 Order in Docket E,G999/CI As to MP s proposed customer notice language, the Department observed that the following language would be consistent with MP s April 20, 2011 compliance filing in Docket , where the Commission required the tariffing of franchise fees: The City of Cohasset granted Minnesota Power a franchise to operate facilities within the City limits. A franchise fee of X% of a customer s bill will be collected from customers effective MM/DD/YYYY. The line item appears on your bill as Cohasset Franchise Fee. Minnesota Power remits 100% of this fee to the City of Cohasset. The Department recommended approval of this notice language instead of the language proposed by MP. As to an effective date of the franchise fee rider, the Department noted that the specific terms of the franchise to be granted to MP are not known at this time, but recommended that given the Commission s 60 day advance notice requirement established in Docket No. E,G999/CI , the Commission should establish an effective date of the franchise ultimately granted MP, but no earlier than October 4, Reply Comments and Supplemental Information Minnesota Power MP filed reply comments on September 16, MP clarified that it is not asking the Commission to become involved in the franchise agreement dispute between Cohasset and MP, but for a matter solely within the Commission s authority: What Minnesota Power petitioned the Commission for is what the Commission, and not the courts, has authority over: a utility s ability to collect the franchise fee from its customers, how it is displayed on the utility bill, and how it is otherwise communicated to customers. As the Minnesota Supreme Court held in Northwestern Bell Telephone Co. v State of Minnesota, 216 N.W.2d 841, 857 (Minn. 1974): Ratemaking is a legislative and not a judicial function. Minnesota Power is not seeking a Commission decision regarding Cohasset s authority to collect a franchise fee since the Minnesota Supreme Court has already decided that matter. MP further noted that Cohasset has not rebutted MP s arguments in the petition that are reinforced by the Department s reasoning and recommendations. Minnesota s precedents and practices are that franchise fees are only collected from the ratepayers in the affected municipality. The Department s summary best rebuts Cohasset s contention: The Minnesota Supreme Court s conclusion that MP is subject to the City of Cohasset s statutory franchise

7 Staff Briefing Papers for Docket # E015/M on October 6,2011 Page 6 authority confirms that this is a franchise fee rather than a general cost of operation. 3 MP also included a discussion of applicable case law starting at page 3 of its reply comments; staff will not repeat those comments here. MP concluded its reply comments by noting that the natural gas pipeline was constructed to provide a cleaner burning start-up ignition source than fuel oil, to enjoin operation of the Boswell Gas Pipeline would prohibit Minnesota Power from starting up any of the four Boswell Energy Center units. Such an action could impinge on the Commission s authority under Minn. Stat. 216B.79 since Boswell Energy Center is a key reliability component of MP s system; if start up is not allowed, it could violate MP s obligations to provide ratepayers adequate and reliable services at reasonable rates under Minn. Stat. 216B.01. On September 23, 2011, MP filed supplemental information with the Commission. The information consisted of documents from the Minnesota Department of Public Service (now the Department of Commerce) noting that the Commission is of the opinion that a utility should charge franchise fees to its customers within the levying jurisdiction. Also enclosed was a February 5, 1981 letter from the Commission stating that MP s proposed method of recovery of a Duluth franchise fee was consistent with past Commission decisions not to allow recovery from ratepayers outside the city imposing a franchise fee. Cohasset On September 28, 2011, Cohasset filed Supplemental Comments. The City contends that: the petition should be denied as unripe, that franchise fees are a cost of operating the pipeline that must be spread evenly to all MP customers who equally benefit from the pipeline s use in producing electricity, and that the Commission does not have primary jurisdiction to overrule a unanimous Supreme Court decision or to interfere with on-going District Court proceedings. Cohasset added a procedural recommendation that if the Commission does not dismiss the MP petition, that the matter should be set for contested case hearing. The City contends that a contested case haring is necessary to develop the factual record necessary for informed agency decision-making and for meaningful judicial review. Cohasset states that it is challenging the rate proposal as unjust and unreasonable, and that if MP s petition were granted, the citizens of Cohasset would be effectively deprived of property in the form of discriminatory rates. Staff Analysis To summarize the source of this dispute, MP sought and obtained a pipeline route permit from The Commission to construct a natural gas pipeline that does not directly serve retail customers, but provides the ability to use natural gas as the ignition source for MP s Boswell Energy Center. The City of Cohasset and MP then became involved in a dispute over whether MP needed a 3 MP reply comments at 3, quoting the Department s comments at 3.

8 Staff Briefing Papers for Docket # E015/M on October 6,2011 Page 7 franchise with Cohasset (and therefore might have to pay a franchise fee to Cohasset) for the part of the pipeline that is within the City limits. The Minnesota Supreme Court found that Cohasset did have the authority to require a franchise and franchise fee. Cohasset has passed an ordinance requiring pipelines to obtain a franchise and requiring any franchise agreement to include a franchise fee. The dispute before the Commission is who has authority to make the decision on whether and how Minnesota Power can pass the franchise fee on to ratepayers. Cohasset alleges that it can make this decision through the franchise agreement; MP and the Department argue that the Commission has this authority. Staff is aware of only one other situation that has come before the Commission where a city has attempted to have a city franchise fee collected from all ratepayers, not just those residing within that city. In Docket No. E-015/M involving the City of Duluth and Minnesota Power, Duluth argued that its flat monthly franchise fee imposed on MP should be built into rates as a general cost of business, not collected solely from customers residing within the city. The Commission approved MP s rider tariff to collect the fee only from Duluth residents. Some of the documents from that case are now in the record in the instant docket as part of MP s September 23, 2011supplemental filing. Commission Authority The first question is whether the Commission has the authority to decide this matter. The City of Cohasset suggests that MP s petition is an attempt to persuade the Commission to overrule a unanimous decision of the Minnesota Supreme Court and is an improper end run around pending judicial proceedings. 4 Staff disagrees. The Minnesota Supreme Court decision settled the issue of whether Cohasset could require MP to obtain a franchise for its natural gas pipeline. It stated clearly and unequivocally that the City of Cohasset could require a franchise (that is, the permission, through an ordinance, franchise agreement, or other operative document, to operate the pipeline). 5 However, the granting of a franchise, and the ability to charge a franchise fee to the utility subject to the franchise, is a completely separate issue from whether and how that utility may pass along that franchise fee to its ratepayers. Cohasset suggests that its franchise with MP must include a provision mandating that all of MP s ratepayers, including those residing outside of Cohasset s boundaries, pay Cohasset s franchise fee. While cities certainly have the authority to require a franchise of utilities, it does not follow that the franchise agreement can contain provisions that intrude on the Commission s authority. The decision to pass along a city-imposed franchise fee to ratepayers outside the city s 4 Cohasset comments at 1. 5 The permission to operate the pipeline should be distinguished from the permission to build the pipeline, which is within the Commission s authority.

9 Staff Briefing Papers for Docket # E015/M on October 6,2011 Page 8 boundaries is squarely within the Commission s jurisdiction, not that of individual cities. Minnesota Statutes 216B.05 states: Subdivision 1.Public rate filing. Every public utility shall file with the commission schedules showing all rates, tolls, tariffs, and charges which it has established and which are in force at the time for any service performed by it within the state, or for any service in connection therewith or performed by any public utility controlled or operated by it. Subd. 2.Schedule and rules filing. Every public utility shall file with and as a part of the filings under subdivision 1, all rules that, in the judgment of the commission, in any manner affect the service or product, or the rates charged or to be charged for any service or product, as well as any contracts, agreements, or arrangements relating to the service or product or the rates to be charged for any service or product to which the schedule is applicable as the commission may by general or special order direct As listed above, the requirement for utilities to file with the Commission extends not only to rates, but to tolls, tariffs, and charges, a much broader group of fees. The term toll, as defined by Merriam-Webster s dictionary, is a tax or fee paid for some liberty or privilege. Black s Law Dictionary defines toll as 1. A tax or due paid for the use of something. 2. A right to collect such a tax or due. A franchise fee is required to be filed at minimum through the term toll, and certainly through the broader term charges. Once the franchise fee has been filed with the Commission, Minn. Stat. 216B.23 grants the Commission the authority to find rates, tolls, charges, schedules, or joint rates to be unjust, unreasonable, insufficient, or unjustly discriminatory or preferential or otherwise unreasonable or unlawful, and if it so finds, it shall determine and by order fix reasonable rates, tolls, charges, schedules, or joint rates to be imposed, observed, and followed in the future This authority does not relate to the municipality s authority to charge the utility a franchise fee, but the utility s ability to pass the franchise fee onto its customers. There is clear statutory authority for the Commission to determine whether this franchise fee can be imposed on just the residents of Cohasset, or to all MP s ratepayers. In contrast, the statute authorizing a municipality to impose a franchise fee on a utility only speaks to the municipality s ability to require the utility to pay it, not how the utility should recover the franchise fee from its ratepayers: 216B.36 MUNICIPAL REGULATORY AND TAXING POWERS. Any public utility furnishing the utility services enumerated in section 216B.02 or occupying streets, highways, or other public property within a municipality may be required to obtain a license, permit, right, or franchise in accordance with the terms, conditions, and limitations of regulatory acts of the municipality, including the placing of distribution lines and facilities underground. Under the license, permit, right, or franchise, the utility may be obligated by any municipality to pay

10 Staff Briefing Papers for Docket # E015/M on October 6,2011 Page 9 to the municipality fees to raise revenue or defray increased municipal costs accruing as a result of utility operations, or both. The fee may include but is not limited to a sum of money based upon gross operating revenues or gross earnings from its operations in the municipality so long as the public utility shall continue to operate in the municipality, unless upon request of the public utility it is expressly released from the obligation at any time by such municipality. The Suburban Rate Authority (SRA), an organization of municipalities, observed this separation of authority in comments to the Commission in the Commission s recent franchise fee proceeding in Docket E,G-999/CI : Minnesota Statutes, Section 216B.36 (as well as Section 301B.01 is the legislative grant of authority to municipalities to charge a fee to gas and electric utilities operating within the city. This typically takes the form of a franchise fee Section 216B.36, however, does not state that the municipality shall require that the utility collect the fee from customers served by the utility It simply provides that the utility may be obligated by any municipality to pay to the municipality fees, to raise revenue Section 301B.01 uses the term compensating the city for the right. 6 In fact, the SRA in that docket stated that to its knowledge, cities were not including language in their franchise agreements specifying how utilities recover these fees from their ratepayers: Neither SRA cities, nor other cities imposing franchise fees, to the SRA s knowledge, include specific language in the franchises or other operative documents that the utility is required to collect the fees from ratepayers in the city, as opposed to direct payment to the city by the utility. 7 The issue is no different than a county s imposition of property taxes on a utility, or the state s assessment of income taxes on a utility. While the county and state, as governmental units, have the authority to assess these taxes on the utility, how the utility passes on those costs to its ratepayers is and has always been the Commission s decision. The passing on of costs imposed by mandated fees or taxes to ratepayers is a separate transaction, regulated by the Commission. Staff articulated this concept of two separate transactions as follows in the Commission s generic franchise fee proceeding: As was discussed in a recent franchise fee docket, it appears that a city s imposition of a franchise fee involves two transactions: first, the city s right to impose a franchise fee on the utility; and second, the utility s ability to pass that franchise fee through to the customer. This first transaction, between the city and the utility, does not involve the Commission. Thus, if a city chooses to impose a 6 Suburban Rate Authority April 25, 2011 comments in Docket E,G999/CI , page 2. 7 SRA April 25, 2011 comments in Docket E,G999/CI , page 2.

11 Staff Briefing Papers for Docket # E015/M on October 6,2011 Page 10 franchise fee on a utility, the utility presumably is obligated to pay it to the city on the date selected by the city through its ordinance.what the Commission has authority over is the utility s ability to collect the franchise fee from its customers, how it is displayed on the utility bill, and how it is otherwise communicated to customers. 8 As such, utilities such as Minnesota Power must file these franchise fees with the Commission, and MP has done so here. Nothing in the Minnesota Supreme Court decision alters the Commission s authority over the second transaction as outlined above. A closely related issue is whether the Commission should dismiss MP s petition. The City states, Rather than write the franchise for Minnesota Power and issue it over the objections of Cohasset, the MPUC should deny this petition as out of order. However, if the Commission were to decide whether Minnesota Power ratepayers that reside outside of Cohasset should pay a Cohasset franchise fee, it would not be rewriting any franchise, which generally covers topics such as the amount of the franchise fee and the use of the city s rights of way. The franchise fee imposed by Cohasset would still remain at one percent of total gas usage if the Commission ruled on MP s petition in this docket. Rather, the Commission would simply be exercising its jurisdiction under Minn. Stat. 216B.05 and Minn. Stat. 216B.23 to determine who pays the franchise fee. Typically if there is a question about Commission authority interfering with the authority of another governmental body, parties would cite to statutes outlining the Commission s authority compared to statutes outlining the other body s authority. It is noteworthy that while the City makes statements that the Commission would be overruling a unanimous decision of the Supreme Court, it cites no language in the decision nor any relevant statutes that support its conclusion. Nowhere does it explain how a city has the authority to make the residents of other cities pay its franchise fee. The Commission could very well decide that all of MP s ratepayers should pay the Cohasset franchise fee, but that is the Commission s decision, not the City s. It appears that the City s request for the Commission to deny MP s petition or stay it is largely based on the premise that some other forum (either the City or the District Court in Itasca County) has the authority to decide which of MP s ratepayers shall pay this franchise fee. Staff has already addressed the authority of the Commission above and also directs the Commission to MP s September 16, 2011 reply comments starting at the bottom of page 3. Staff would note that the timing of this MP petition is less than ideal; this does not mean the dispute is not ripe. A franchise agreement has not been finalized between the parties, but it is staff s understanding that the sole item remaining in dispute is whether the franchise should contain a provision dictating whether ratepayers outside the city of Cohasset should pay the Cohasset franchise fee. If MP were to sign a franchise agreement containing this language and then file its rider petition, the Commission would likely say that MP should not have signed an agreement infringing on the Commission s authority. 8 Staff briefing papers, Docket E,G999/CI , for February 24, 2011 agenda meeting, p. 10.

12 Staff Briefing Papers for Docket # E015/M on October 6,2011 Page 11 And although a franchise agreement has not been signed, a franchise ordinance does exist, specifying that an owner or operator of pipeline shall pay a franchise fee. The MP pipeline in question meets the definition of pipelines covered by the ordinance. The franchise ordinance specifies that in any franchise granted the City of Cohasset shall impose a fee of 1% of the fair market value of the gas or liquid delivered via the Designated Pipeline to end users within the City of Cohasset, plus an additional 1% of the fair market value of the transportation of such gas or liquid with the city of Cohasset... While the City also argues that the issue is not ripe by noting that MP is seeking to add a rider to a non-existent franchise, it is not unusual for the Commission to approve a petition for a rider before costs flow through that rider. For example, when the Commission first approved Xcel s request for a renewable recovery rider, the rider did not initially include any costs; rather, the regulatory framework for the rider was set up. The next step, as the Commission stated in its January 14, 2003 Order approving Xcel s rider proposal, was for Xcel to submit a list of projects for which it intended to seek cost recovery through the rider, and then in a later step file a summary of the costs recorded in its tracker account. 9 It would be consistent with past Commission practice to approve a rider, and establish the framework for the rider, even if costs may not immediately be passed through that rider. Staff notes that utilities normally file generic tariff language when they request permission for a rider, and MP has done so here. Finally, staff would note that the Commission has exercised jurisdiction over franchise fees for at least 35 years, and recently, in Docket E,G999/CI , it established a streamlined filing process for the filing of franchise fees in utilities tariffs. In all past utility-specific dockets, the Commission has approved the passing through of franchise fees to ratepayers. Who Should Pay Franchise Fees in Situations such those Present in the Cohasset Issue? If the Commission agrees that it has the authority to rule on MP s petition, then two additional questions remain: Should the Commission act on the merits of MP s Rider for Facilities Franchise Fees at today s meeting? If so, should the Commission approve the Rider? Procedures and Timing With respect to whether a decision should be made at today s meeting, the Commission has several options. It could find that more information is needed before making the decision and ask for additional written comments, it could set the matter for contested case hearing, or it could make a decision based on the record to-date. It is staff s understanding that MP intends that its Rider apply in situations where a city is imposing a franchise fee on facilities such as its natural gas pipeline to the Boswell Energy Center; MP does not intend this to apply to traditional electric franchise fees imposed by 9 See the Commission s Order in Docket E002/M

13 Staff Briefing Papers for Docket # E015/M on October 6,2011 Page 12 cities in its service area. Staff notes that the Commission recently took action on how all rateregulated utilities should file franchise fees in their tariffs in a generic docket, but was not aware of this dispute at that time and did not have this type of franchise fee in mind when it established those processes. To-date, all franchise fee issues before the Commission have related to cities imposing franchise fees related to facilities used in the direct provision of retail service by the utility. The issue of a franchise fee imposed on an electric utility who does not provide retail natural gas service in the city for a natural gas pipeline is an issue of first impression. The Commission may want parties to file additional argument or information before deciding the issue. The Commission could also set the merits of the matter for contested case hearing, which is the City s alternative recommendation. In addition, MP has only filed very general tariff language. There are issues remaining on how the 1% fees specified in the Cohasset ordinance would be translated into a rate to be paid by residents of Cohasset. There would need to be an estimate of how much monies need to be collected and how those monies would be allocated to, and collected from, various customer groups. Staff presumes some methodology akin to how the Duluth franchise fee is collected would need to be developed. That issue is not developed in the record to-date. However, those issues do not necessarily need to be determined prior to approving the general Rider. Merits of the Issues of Who Pays With respect to the decision on whether franchise fees imposed by cities on MP for facilities that are not electric facilities, there are policy arguments on both sides of the issue. There are several valid policy arguments in favor of modifying MP s petition and requiring all Minnesota Power ratepayers to pay the Cohasset franchise fee. As the City points out, the franchise fee is not on MP s electric service, but specifically assesses a fee on MP s total gas usage through the Boswell pipeline. The pipeline serves MP s generation, which benefits all MP ratepayers. As the cost of generation is passed to all ratepayers, so should this fee. This is also how property taxes on a utility s generation are passed through to ratepayers; property taxes are passed through to all ratepayers in rate cases. Given that the stated reason for this franchise fee is to address costs of protecting facilities that serve generation, it could be considered consistent with the treatment of property taxes. A third argument in support of passing the franchise fee onto all ratepayers is that while the franchise fee supplements the City s budget, the City may be incurring extra expenses for the gas pipeline running through its boundaries, and given that the permission to construct the pipeline was within the Commission s authority through the granting of a route permit, Cohasset had no choice but to incur these extra expenses to protect a pipeline serving generation that benefits all of MP s ratepayers. A practical question that arises if the Commission were to find that all MP electric customers

14 Staff Briefing Papers for Docket # E015/M on October 6,2011 Page 13 should pay the franchise fees in the Cohasset-type situations is how would the monies be collected? Should it be a separate line item on all customer bills, or should it be built into general rates the next time MP files a rate case? There are arguments in support of approving MP s proposal (and the Department s recommendation). First, it could be argued that the traditional practice always has been to pass through franchise fees to the residents of the city that proposed them for transparency s sake. Uniformity and transparency are valid public policies and benefit ratepayers by allowing them to know what expenses they are and are not paying for. Second, the Commission could adopt the Department s reasoning that the franchise fee supplements the City s budget and therefore benefits the residents of the City, justifying the pass through to city residents only. Third, the Commission could point to the case law cited by Minnesota Power and observe that most of the case law from other states impose franchise fees on only the residents of the city that imposed the franchise fee. Fourth, the Commission could observe that Cohasset already had the authority to require an electric franchise if the Commission changes the cost allocation of franchise fees for one city, other municipalities could follow suit and ask that their franchise fees be passed on to nonresident ratepayers, if those cities also have facilities serving generation within their borders. The above are all general reasons the Commission could consider in making a decision one way or another. Staff does agree with the Department s recommendations on tariff language and customer notice language, if the Department s recommendation to pass the franchise fee to Cohasset residents only is adopted by the Commission. But the Commission could also wait to decide the specifics of the tariff language and customer notice until the specifics of the franchise fee rate are more fully developed. If the Commission decides to pass the Cohasset fee onto all of MP s ratepayers, the tariff language would need to be amended, and another look may need to be taken at the customer notice to minimize customer confusion.

15 Staff Briefing Papers for Docket # E015/M on October 6,2011 Page 14 Decision Alternatives I. Commission Authority A. Find that the Commission has the authority to address the petition filed in this docket. OR; B. Find that the Commission does not have the authority to address the petition filed in this docket, and dismiss the petition. II. Approval of MP s Proposed Facilities Franchise Fee Rider A. Approve Minnesota Power s proposed Facilities Franchise Fee Rider. Allow the Rider to be effective for application to the City of Cohasset pipeline franchise fee the date of the franchise granted MP, but no earlier than October 4, Direct MP to file additional tariff language for further Commission review specifying how it will calculate the fee and collect the franchise fee from its Cohasset ratepayers. OR; B. Modify Minnesota Power s petition to require it to assess Facilities Franchise Fees on all of its ratepayers in its service territory in Minnesota. a. Direct Minnesota Power to make an amended tariff filing for further Commission review outlining how it proposes to charge its ratepayers the Cohasset franchise fee situation within 15 days of a written order in this docket OR; b. Determine that MP cannot adjust rates to recover such franchise fees outside of a general rate case. C. Take additional comments on the merits of which of MP s ratepayers shall pay the Cohasset franchise fee. Direct staff to issue a notice seeking comments on this issue. D. Refer the matter to the Office of Administrative Hearings for a contested case. E. Table this matter until after the completion of the MP/Cohasset matter in District Court. III. Notice to Customers (if the Commission acts on the merits today) A. Approve the customer notice language recommended by the Department of Commerce. B. Approve the customer notice language recommended by MP. C. Delegate the authority to the Executive Secretary to approve the customer notice in this docket.

16 Staff Briefing Papers for Docket # E015/M on October 6,2011 Page 15 ATTACHMENT 216B.36 MUNICIPAL REGULATORY AND TAXING POWERS. Any public utility furnishing the utility services enumerated in section 216B.02 or occupying streets, highways, or other public property within a municipality may be required to obtain a license, permit, right, or franchise in accordance with the terms, conditions, and limitations of regulatory acts of the municipality, including the placing of distribution lines and facilities underground. Under the license, permit, right, or franchise, the utility may be obligated by any municipality to pay to the municipality fees to raise revenue or defray increased municipal costs accruing as a result of utility operations, or both. The fee may include but is not limited to a sum of money based upon gross operating revenues or gross earnings from its operations in the municipality so long as the public utility shall continue to operate in the municipality, unless upon request of the public utility it is expressly released from the obligation at any time by such municipality. Notwithstanding the definition of "public utility" in section 216B.02, subdivision 4, a municipality may require payment of a fee under this section by a cooperative electric association organized under chapter 308A that furnishes utility services within the municipality. All existing licenses, permits, franchises, and other rights acquired by any public utility or municipality prior to April 11, 1974, including the payment of existing franchise fees, shall not be impaired or affected in any respect by the passage of this chapter, except with respect to matters of rate and service regulation, service area assignments, securities, and indebtedness that are vested in the jurisdiction of the commission by this chapter. However, in the event that a court of competent jurisdiction determines, or the parties by mutual agreement determine, that an existing license, permit, franchise, or other right has been abrogated or impaired by this chapter, or its execution, the municipality affected shall impose and the public utility shall collect an excise tax on the utility charges which from year to year yields an amount which is reasonably equivalent to that amount of revenue which then would be due as a fee, charges or other thing or service of value to the municipality under the franchise, license, or permit. The authorization shall be over and above taxing limitations including, but not limited to, those of section 477A.016. Franchises granted pursuant to this section shall be exempt from the provisions of chapter 80C. For purposes of this section, a public utility shall include a cooperative electric association. History: 1974 c 429 s 36; 1978 c 795 s 5; 1Sp1981 c 1 art 6 s 8; 1982 c 378 s 1; 1991 c 291 art 9 s 4