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LLOYD, GOSSELINK, BLEVINS, ROCHELLE, BALDWIN & TOWNSEND, P.C. ATTORNEYS AT LAW 111 CONGRESS AVENUE TELEPHONE (512) 322-5800 SUITE 1800 Mr. Cray's Dir~'tLine: (512)322-5875 TELECOPIER (512)472-0532 AUSTIN, TEXAS 78701 Email: g~ay~lglawfim].com www. lalawflrm.com MEMORANDUM TO: CAPP Members FROM: Geoffrey M. Gay DATE: September 5, 2003 RE: Electric Franchise Fees For 2002 Cities that recently received franchise fee payments in August for electric consumption in 2002 may have noticed a decline in value in comparison to comparable payment in 2001. Many cities may experience significant (double digit percentage) lost revenue. The primary causes for decreased fee payments are: first, a 1999 legislative change to a formulaic approach that became effective January 1, 2002 and second, 2001 was an extraordinary year for utility revenues because of high fuel costs and surcharges of previously under-recovered fuel costs. It is important to note that the selection of a particular retail provider over other potential providers plays no role in the calculation or payment of franchise fees. In other words, the franchise fee payments to CAPP member cities during 2003 for consumption within municipal limits during 2002 is not influenced by CAPP's choice of provider. Your city's franchise fee recovery would be the same irrespective of whether CAPP contracted with First Choice Power, TXU, Reliant, or any other retail electric provider that serves the Texas market. PUPA Section 33.008 now requires that franchise fees be based upon a factor (that will vary by city) multiplied by the total sales (kWh) within municipal limits. The factor is the ratio of kWh consumption within a city during 1998 and the franchise fees paid on those 1998 sales (factor = 1998 fees/1998 kWh). Thus, current franchise fees are not sensitive to changes in the price of electricity. Furthermore, it is the incumbent transmission and distribution or "wires" company that is responsible for paying franchise fees as a rental on the use of public rights-of-way. The franchise fees are recovered by the wires company as part of the non-bypassable rates set by the Public Utility Commission. CAPP's legislative agenda during the most recent regular legislative session included a bill to add an inflation adjustment to the statutory language on how electric franchise fees are to be calculated. The bill did not get out of committee. This issue will likely remain on CAPP's legislative agenda until the law is changed. 1813\00~mac~mmo030905gmg