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Council OKs gas franchise fee despite protests

Monday, October 2, 2006 by

Despite opposition from large natural gas customers, the Austin City Council made changes to the franchise agreement with Texas Gas Service on second reading Thursday, phasing in a controversial franchise fee to companies that were previously exempt

Some of the city’s largest industrial customers do not buy their natural gas from Texas Gas Service. Instead, they contract with other companies and secure lower rates based on their high volume purchases. Since they are not Texas Gas Service customers, they do not pay the 5 percent franchise fee the company charges as allowed by city regulations. The ordinance passed on first reading would have begun applying that 5 percent fee to those businesses that purchase their gas from third-party companies.

However, the outside counsel retained by the city for the negotiations with Texas Gas Service recommended phasing that fee in over the next four years. The fee for those third-party customers would go to 2.5 percent in 2008, then up to 5 percent in 2010. In addition, large public institutions such as the University of Texas, AISD, and hospitals such as Seton, Brackenridge and Children’s Hospital that provide charity care would continue to be exempt.

While some large private customers told the Council that phasing in the fee would be preferable to an immediate 5 percent increase, they disputed the need to apply the fee at all. “I hope the fact that you have not seen 3M before this body before should give you some kind of idea as to the gravity this particular policy change has to my company,” said Russell Bridges with 3M in Austin. “We are generally opposed to the expansion of the franchise fee to transportation customers of Texas Gas Service. At a time when communities, including our own, are competing to attract new major employers…it makes little sense to implement this new fee.”

Bridges also said the company objected to the fact that the fee would likely be calculated on the price of natural gas sold at the Houston Ship Channel, not the price actually paid by 3M or other large industrial customers in the Austin area. Those customers negotiate lower rates with their independent providers, he said, and those rates are considered confidential. While the provision passed by the Council on second reading does allow companies to pay the 5percent on the rate they actually pay, Bridges said disclosing those rates would put the company at a major disadvantage.

“Our 3M Austin employees work hard daily to make our businesses profitable, and this fee works against their efforts,” he concluded. “It sends a message that current employers can be tapped with new fee schemes that have no clear relevance to the cost of providing any new city services.”

Along with 3M, other large employers that could be affected include Freescale, AMD, Coca Cola of Austin, the downtown Hilton hotel at the Austin Convention Center, and several of the city’s largest apartment complexes. “We are puzzled that you would extend this new fee even as you offer incentives to other employers to come to our city,” Bridges said. “3M is a significant contributor to our local economy. The company looks at recent actions by government when considering expansion opportunities.”

But Council Member Jennifer Kim countered that 3M could easily afford to pay the fee, considering that the company posted $21 billion in global sales last year. “What we’re trying to send is a message that everyone needs to pay their fair share,” she said. “It’s also sending a signal to our small businesses if we don’t charge companies like yours…that they should pay it and you shouldn’t. I think it’s only fair that people who use transported gas through the Texas Gas Service lines pay their fair share.”

Council Member Lee Leffingwell agreed. He told In Fact Daily that the city would earn only an additional $600,000 by adding the fee but that the city needs to protect itself from future changes in gas purchasing patterns. “The important thing for me was to make sure that this isn't a constantly eroding process in our franchise fee as more and more people decide to exercise that option,” to purchase from a different gas company. He added, “It’s basically unfair,” because home users and small businesses have to pay the fee but large businesses have been exempt.

The Council unanimously approved the franchise agreement on second reading, including the provision to phase in the 5 percent franchise fee for those third-party “transport” customers. The agreement will be up for third reading at the Council’s next meeting on Thursday.

©2006 In Fact News, Inc. All rights reserved.

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