June 29th, 2012
Freethought San Marcos: Flim-flam over PEC, San Marcos franchise fee

Freethought San Marcos: A column
by LAMAR W. HANKINS

Occasionally something happens that causes a person to look at the world a bit differently than before.

Such was the case when I received a letter from RB Sloan, CEO of Pedernales Electric Cooperative (PEC) a few days ago. Some people who live in the city of San Marcos can receive electric service only from PEC because the state gives PEC an assigned electric service area. That service area includes a portion of the city of San Marcos.

Sloan’s letter explained that it has been paying the city a 2 percent fee to use the public right-of-way and for the city to supervise PEC’s use of that right-of-way. Because of a recent re-negotiation of PEC’s franchise to use the public right-of-way inside the city, PEC will now pay for one year a 6.5 percent fee, beginning Sept. 1. For the following four years, that fee will be 4.5 percent. Currently, PEC’s payment of a 2 percent fee is based on the gross revenues it receives from its electric customers who live within the city. PEC pays this fee out of those gross receipts.

The major change for the next five years is that PEC will not pay its franchise fee from its gross receipts, but will treat it as a pass-through fee to its customers. Each month PEC customers will have 4.5 percent added to their electric bills. PEC will continue to pay the current 2 percent fee out of its gross receipts. According to City Attorney Michael Cosentino, PEC claimed during negotiations with the city that it would not be able to re-program its computer software to pay the 6.5 percent fee for the next year out of gross receipts, so the add-on charge would be necessary. While I am not a computer programmer, this seems like a simple programming issue to me and either a poor excuse or a lack of competency by PEC.

PEC will pay the additional 4.5 percent next year within thirty days of the end of each quarter. It seems only fair that I should pay PEC the 4.5 percent pass-through charge at the end of each quarter, rather than allow PEC the use of my money for one to nearly four months. I know of no rule that requires me to subsidize PEC by allowing it the free use of my money. That money may earn only 0.44 percent, but as we all learned in grade school, “a penny saved is a penny earned.”

The reason given by Cosentino and San Marcos City Manager Jim Nuse for the jump to 6.5 percent for one year is that PEC delayed the negotiation process by 18 months, during which time the city was not collecting a higher fee, presumably the 4.5 percent that will take effect in September 2013.

Hence, for one year, PEC customers in the city will have to pay the higher fee to make up for the inability of city and PEC officials to agree in a timely way to a new fee for the full five years of the franchise agreement.

One of the city’s arguments for the increase in the franchise fee is that the City-owned electric utility pays 8.5 percent (expected to be lowered to 7 percent for future years) of its revenues to the city’s general fund. To some extent, this payment is justified because the city manager and his assistants and other city employees spend part of their time working on city electric matters, but their salaries and expenses are paid for through general revenues. So far as I am able to determine, no one has suggested that the city used a rational basis for determining exactly how much their time and expenses are worth. In previous years, the city has looked at what other cities in a similar situation have charged their electric utility for the services paid for by the general fund. The idea is that if others are charging a certain amount, then that justifies the city of San Marcos’s charging the same amount. Of course, some people pay the full sticker price for an automobile, but that doesn’t mean that I should do so. Basing fees on what others charge is not rational government policy-making.

I asked Nuse, Cosentino, and Sloan if they had used some rational basis for determining what is an appropriate amount for the franchise fee. The short answer was “no.” They had not done research to determine what would be a fair and reasonable franchise fee based on the actual cost to the City of administering the franchise or allowing use of the public right-of-way.

In no way am I suggesting that either the city or PEC has violated any laws in arriving at a franchise fee that is more than triple the current fee for the first year and more than double the current fee for the following four years. But I am suggesting that city and PEC officials have not used any rational basis to determine what a franchise fee should be. The city has pushed for as much revenue as it can get. PEC has acquiesced to that amount because it will not pay it, but will pass that cost directly to its customers, who also pay taxes to the city.

This process has caused me to think about the use of right-of-way differently than I have thought of it previously. When the subdivision in which I live was designed and approved by the city around 1995, the developer dedicated the streets and adjacent rights-of-way and conservation easements to the city under the existing development codes. The city did not pay for those rights-of-way. The developer then sold the lots to individuals for prices that took into account all of its costs, including the cost of all the public areas that were dedicated to the city for use by the public. When I bought my lot, I paid for the right-of-way that was given to the city because that cost was calculated into the purchase price. The city should hold that right-of-way in trust for my use and the use of others who need it for transportation and utility service.

Instead, the city is charging me again for the use of right-of-way I previously paid for when I bought my lot, by charging an electric service a fee to get that electricity to me. It is making a profit on what it did not pay for. In addition, the amount of the charge it is making has no rational basis; that is, no one at the city or PEC can explain how the figure was determined. If it costs the city money to administer the franchise agreement, then it should recover those costs, but no one knows what those costs are. I paid for the right-of-way that the city holds in trust for use by utility providers. Why should I have to pay for the use of that right-of-way over and over again, year after year?

I believe that we should pay for the cost of good government. I am not one who resents paying taxes. That is the cost of living in a civilized society, and it is a cost I gladly pay. All I ask as a citizen is that the cost be fair and be fairly distributed. The PEC pass-through franchise fee is not fair because it is for the use of something I have already bought and paid for, and it has no rational basis. If the city needs another $160,000 (the approximate value of the PEC franchise fee each year), it should raise taxes, not embed that amount in an irrationally-derived fee.

Neither the city nor PEC represented the interests of their respective taxpayers and customers when they negotiated the new franchise agreement. They did what has always been done. The city decided how much revenue it needed from PEC to add to its general revenues, and PEC said that’s fine because we will just pass on those costs directly to our customers, who are also the city’s taxpayers. Both entities played a game of three-card Monte with the ratepayers’/taxpayers’ money and property. Maybe it’s time to re-think the franchise fee and replace it with a rational and fair system.

© Lamar W. Hankins, Freethought San Marcos