JOINT STUDY COMMITTEE ON FRANCHISE FEES AND CONDITIONS, RIGHTS OF WAY & TAX IMPLICATIONS OF COMPETITIVE MARKETS

Transcription

1 JOINT STUDY COMMITTEE ON FRANCHISE FEES AND CONDITIONS, RIGHTS OF WAY & TAX IMPLICATIONS OF COMPETITIVE MARKETS TO: The Gvernr, Lieutenant Gvernr, Speaker f the Huse f Representatives, Members f the General Assembly, and Other Interested Parties Prepared by the Offices f Huse and Senate Research The Cmmittee Senatr Terrell Starr, Chair Representative Newt Hudsn, Chair Sen. Charles Walker Ms. Nancy Hrne Mr. Bill Archer Mr. Bill Crker Mr. Bill Verner Rep. Jimmy Skipper Hn. Bb Knx Dr. H. Edwin Overcast Mr. Bbby Rwan Mr. Jim R. Newman I. Intrductin SR 544/Act 105 creates a study cmmittee t examine municipal and cunty franchising authrity and the impact f fees assessed fr use f the public rightsf-way n the develpment f cmpetitin. In an effrt t better understand franchise fees and the impact such fees have n lcal entities in Gergia, this jint study cmmittee cmmissined the Schl f Plicy Studies at Gergia State University t help research and define these impacts. Once the cmmittee received this backgrund infrmatin, meetings began t discuss the varius issues that were invlved. The cmmittee held five meetings in Atlanta in rder t give all participants a chance t discuss their cncerns regarding franchise fees. In a reprt issued t the cmmittee, Bruce Seaman f the Schl f Plicy Studies explained the imprtance f studying these tax implicatins:

2 Firms prviding electricity, natural gas, and the varius telecmmunicatins services are subject t a variety f state and lcal taxes and fees that differ substantially acrss states. Franchise fees are typically implemented as part f an agreement executed between lcal gvernments and a utility cmpany, r ther enterprises such as cable cmpanies which utilize public rights-f-way. Currently in Gergia, where franchise fees are required, telephne cmpanies pay a 3% franchise fee t municipalities; cable cmpanies pay between 3 and 5% t cunties and municipalities; electric cmpanies pay 4% t municipalities; and natural gas cmpanies pay 3% t municipals. In ttal, apprximately $188 millin dllars is paid t municipalities and cunties each year. Cities receive 91% f these fees and cunties receive 8% f these fees. The relative imprtance f such franchise fee revenues t specific lcal gvernment jurisdictins varies very widely. When calculated as a percentage f what the Department f Cmmunity Affairs identifies as "Tax Revenue", franchise fees represent an average f nly.021% f ttal tax revenues fr the cunties in Gergia. Using a cmbinatin f the DCA data and the reprted payments f franchise fees by the cmpanies themselves, it is clear that franchise fees are much mre imprtant surces f revenue t municipalities. Fr the 525 such gvernmental units in the DCA data, franchise fees represented an average f 6.66% f ttal tax revenues. Dr. Seaman explained that fr the fllwing reasns, a re-evaluatin f the rle and structure f franchise fees is timely: Sectin 253 f the 1996 Telecmmunicatins Refrm Act restricts barriers t entry and mandates lcal gvernments t manage rights f way n a "cmpetitively neutral and nndiscriminatry basis." Onging technlgical develpments in additin t the mvement tward de-regulatin. Financial and tax audits in Gergia cities are generating increased pressure amng lcal gvernments t re-evaluate the justificatin fr limiting the base fr the assessment f franchise fees. Such ptential lcal gvernmental variatins in the structuring f franchise fee agreements threaten t crate even larger administrative burdens n cmpanies paying such fees. The pending natural gas deregulatin in Gergia raises similar issues f hw t apply sales r use taxatin and design franchise fees fr ptential new cmpetitrs and/r their custmers.

3 Similar de-regulatry develpments in the electricity industry, while nt as immediately pending, will raise similar issues f hw t apply state and lcal taxes and fees t nn- Gergia firms generating electricity t lcal custmers. All f these issues raise the specter f ptential revenue lss frm all grss receipts based taxes and fees as a result f a reductin f price fr these services and a pssible resulting reductins in ttal revenues, and a further ptential lss f a prtin f these taxable revenues t the extent that custmers switch t nn-gergia cmpanies fr whm tax nexus cannt be established. II. What ther states are ding A. In Pennsylvania, ut-f-state as well as in-state generatrs and marketers f electricity must btain a license frm the Pennsylvania Public Utility Cmmissin prir t being allwed t sell electricity within the state; befre a license is granted the marketer must certify that it will pay the franchise fee, as well as cllect and remit all sales and use taxes impsed by the state. B. In Nrth Carlina, attempts are being made t change the definitin f a "utility" t include ut-f-state marketers and generatrs in the natural gas industry by including as a utility "a business entity that sells piped natural gas," which wuld include nn-nrth Carlina cmpanies using the lcal distributin cmpany's pipelines. Such cmpanies wuld then pay the 3% franchise fee. C. In Flrida, steps are being taken t develp franchise fee rdinances that wuld require electricity prviders, whether regulated r unregulated generatrs r marketers, t first btain a franchise with the particular city, which in turn requires that the electricity prvider agree t pay a franchise fee. In additin, Flrida cmmissined a "Telecmmunicatins Task Frce" t review the tax burden n that industry, including the grss receipts tax. The task frce recmmended a unified tax arrangement similar t a "telecmmunicatins excise tax" as sme percentage f grss revenues, including pssible expansins f the tax base. There was sme debate regarding the definitin f the tax base related t the cncept f "taxing capacity," but eventually the Flrida legislature failed t enact the prpsal due largely t apparent cncerns abut the change being perceived by the public as a "new tax," as ppsed t a relatively revenue neutral change in the tax structure. D. Suth Carlina has adpted a variatin n these appraches that "strengthens" the franchise system by supplementing it in telecmmunicatins with a business

4 license tax f 3% f grss revenues, payable by all lng distance phne service prviders and resellers wh are nt paying franchise fees. E. New Jersey has established a 6% "Energy Cnsumptin Tax," with current utilities paying a transitinal assessment fr five years t ensure stability f revenue, in state as well as ut- f-state paying the same tax burden. The state has "guaranteed": cities that they will receive a ttal f $745 millin in FY 1998, grwing t a stable $750 millin per year by F. Califrnia has substituted a cnsumptin tax n all natural gas and electricity suppliers equal t the previus franchise fee rate. G. Kentucky has passed legislatin which amends its utility grss receipts license tax t apply t any Kentucky purchaser f natural gas, electricity, cable, and "ther items" when the prvider/seller f such services is nt subject t that utility grss receipts license tax. This change seems t make the lcal tax mre similar t Kentucky's use tax n such items. Kentucky has als created the electricity Restructuring Task Frce, whse gal is t study electricity restructuring in the state, and has als created a related Task Frce n Utility Tax Plicy. III. What we are ding in Gergia The fllwing tw tables prvide an verview f the current structure (Table 1) and the revenue (Table 2) f franchise fees in the state.see Ftnte 1 Table 1 Overview f Sales and Franchise Fee Structure Service Sales Tax Sales Tax Base Franchise Fee Franchise Fee Base Identified n Custmer Bills Franchise: N Telephne (Wired): BellSuth; Independent Phne 4%- cunty Basic lcal + mst ptinal services per 3% t municipalitie s Grss receipts fr "recurring lcal service" nly; i.e. nt applied t pay

5 Cmpanies custmer phne, ptinal service, access etc. Cellular phne 4%- cunty Other telecmmuni - catins; paging, PCS, net access; cnferencing etc. Cable TV 4%- cunty Mnthly service nly; nt air time Nne Nt applicable NA Nne NA Nne NA NA Cnverter rental fee; nt basic service 3-5% t cunties and municipalitie s Full basic service + cnverter rental revenue Satellite TV* Nne NA Nne NA NA Electricity: GA Pwer; EMC's Natural Gas: Atlanta Gas Light; United Cities; ATMOS Energy 4%- cunty 4%- cunty Mnthly usage per custmer Mnthly usage per custmer 4% t municipalitie s 3% t municipalitie s Ttal electricity sales receipts Ttal gas sales receipts excluding interruptible, i.e.industrial custmers** Franchise: Yes Franchise: N Franchise: N * The Telecmmunicatins Refrm Act f 1996 (TRA96) permits a state t impse a separate state- wide tax n Direct Bradcast Satellite (DBS) prviders and then redistribute such revenues back t lcal gvernments. N states have chsen t d this t date. ** The base fr establishing franchise fee payments by Atlanta Gas Light Has been changed by a recent agreement negtiated with the Gergia Municipal Authrity (GMA), by which a franchise fee t a given municipality shall equal"the prduct f the Design Day Capacity and the current franchise fee factr", which in turn "shall equal the prduct f the base year franchise fee factr and ne plus the inflatin index expressed as a decimal t three significant places (frm sample cntract prvided by Atlanta Gas Light).

6 Table 2 Ttal Franchise Fees Paid t Municipalities and Cunties Surce f Payment Time Perid Amunt Paid % f Ttal Franchise Fees Paid Gergia Pwer Net paid in $85,845, % 1998 fr 1997 GEMC 1997 $5,943, % BellSuth 1997 $22,009, % Other Telecm 1997 $9,015,000 * est. by 5.23% BellSuth; estimate f GMA = $5 millin Atlanta Gas Light Calendar $13,097, % 1996 United Cities Gas 1997 $1,000,000** est. by GMA.58% Cable Cmpanies 1997 $35,520, % Ttal Municipality $ 172,430, % Cable Cmpanies paid t Cunties Ttal All Franchise Fees 1996 $15,750, % f cunty fees $188,180, % paid t cities The revenue generated by franchise fees varies widely between cities and cunties. Accrding t the Department f Cmmunity Affairs (DCA), franchise fees are an average f.021% f ttal tax revenue fr the 159 cunties in Gergia, and n cunty reprts franchise fees as high as 1% f tax revenue. This is mainly due t the fact that cunties nly assess franchise fees n cable cmpanies. Franchise fees are a much higher surce f revenue fr the municipalities f the state. Accrding tt he DCA, these fees were an average f 6.66% f the 525 municipalities ttal tax revenue. A clser lk at this data by Dr. Bruce Seamans f Gergia State University has indicated that amng cities the fees relatinship t ttal revenue varies widely. It ranges frm 0% fr 11 cities t a reprted 100% fr the twn f Between. The fllwing table represents the break dwn f certain percentages as reprted by Dr. Seaman.

7 Table 3 Franchise Fees as a Percentage f Ttal Revenue Percentage f 525 Municipalities Percentage f Ttal Revenue 1.14% Over 80% 4.95% At least 25% 17. Over 10% 66.29% Less than 4.0% 47.05% Less than 2.0% The deregulatin f natural gas in Gergia raised questins with regard t the cllectin f these franchise fees frm gas marketers. This has led t a new agreement between the Gergia Municipal Assciatin and Atlanta Gas Light. The agreement seems t have created a remedy fr the cllectin f franchise fees in this newly unregulated sectr. The eventual deregulatin f the electricity industry culd pse similar questins, hwever it des nt appear that this will ccur in the immediate future. The mst pressing area fr re-examinatin lies in the telecmmunicatins area. Sectin 253 f the Telecmmunicatins Refrm Act f 1996, restricts the impsitin f barriers t entry in this sectr. Cmpensatin fr the management f right-f-ways is left t state and lcal gvernments t be carried ut in a cmpetitively neutral manner. BellSuth and the GMA have been in negtiatins with regard t the franchise fee issue and will cntinue t negtiate fllwing the present legislative sessin. Industry representatives n the cmmittee have nt indicated a pressing need fr legislative actin, and neither have representatives f the cnsumer. Furthermre, there appears t be a high level f cmmunicatin between the majr parties invlved with the franchise fee issue. Fr these reasns, the cmmittee calls fr

8 n legislative recmmendatins at this time. Hwever, the General Assembly will cntinue t lk at this issue in Gergia as markets and technlgy change. IV. Cnclusin As a result f the Jint Study Cmmittee n Franchise Fees and Cnditins, Rights f Way, and Tax Implicatins f Cmpetitive Markets, the State f Gergia has enabled all f these entities t cme tgether t wrk ut their differences. As stated previusly in this reprt, the natural gas industry has already established an agreement with municipalities. The electric cmpanies d nt fresee their situatin as yet smething that needs changing, and all ther entities invlved are currently in negtiatins t wrk ut their differences. While the cunties still have sme disagreement abut the amunt f franchise fees they get, the cmmittee feels that anything that wuld change their current status wuld be viewed as a tax increase t Gergia's citizens. This is smething that members f the cmmittee, particularly legislative members, are adamantly ppsed. It is the agreement f the cmmittee that there is nt a need fr legislatin at this time. Legislative members f this cmmittee, hwever, plan t keep a clse watch n the negtiatins between all entities invlved, in a effrt t make sure that the end result is smething in which lcal citizens in Gergia benefit. It is the respnsibility f these members t carefully negtiate their terms and cnditins in a way that prvides full and cmplete services at the lwest pssible cst t Gergia's taxpayers. Respectfully Submitted, Senatr Terrell Starr, Chairman Senatr Charles Walker Ms. Nancy Hrne Mr. Bill Archer Mr. Bill Crker Rep. Newt Hudsn, Chairman Rep. Jimmy Skipper Hnrable Bb Knx Dr. H. Edwin Overcast Mr. Bbby Rwan

9 Mr. Bill Verner Mr. Jim R. Newman Ftnte: 1 Tables 1 and 2 are frm a reprt by Dr. Bruce A. Seaman, entitled An Analysis f Franchise Fees in Gergia: Preliminary Reprt, Fiscal Research Prgram, Schl f Plicy Studies, Gergia State University. August 1998.