To: HONORABLE MAYOR AND From: Scott P. Johnson

CITY COUNCIL

SUBJECT:

PACIFIC GAS AND ELECTriC COMPANY (pg&e) fRANCHISE FEE ORDINANCE AMENDMENT

DATE:

May 30, 2003

Council District: City-wide

SNI: NA

RECOMMENDATION

It is recommended that the City Council:

a) Approve an ordinance amending the franchise with PG&E for the sale of gas within the City (Ordinance No 15879 as amended by Ordinance No. 21676) providing that in the event of an overpayment of PG&E's annual franchise fees to the City, upon approval by the City, PG&E may deduct from the next year's quarterly payments the overpayment in equal amounts, without interest.

(b) Approve an ordinance amending the franchise with PG&E for the sale of electricity within the City (Ordinance No 15880 as amended by Ordinance No. 21677) providing that in the event of an overpayment of PG&E's annual franchise fees to the City, upon approval by the City, PG&E may deduct from the next year's quarterly payments the overpayment in equal amounts, without interest.

BACKGROUND

On September 20, 1971, the City Council approved ordinances granting to Pacific Gas and Electric Company (PG&E) franchises for the use and construction of electricity and gas transmission and distribution infrastructure on city-owned property. PG&E, as consideration and compensation for receiving the franchises, paid an amount equal to one percent of PG&E’s gross receipts during each calendar year covered by the original franchises (the franchise fee). Since their approval in 1971, the electricity and gas franchise ordinances have been amended and approved by Council on June 5, 1984, changing the franchise fee to two percent of gross receipts.

ANALYSIS

Franchise Fee Calculation Methodology

The current franchise ordinances, as amended, outline the manner by which the two percent franchise fee payment is made to the City. Franchise fee payments for both electricity and gas are paid on a calendar-year quarterly basis and are based on total gross receipts from the previous calendar year. Pursuant to the franchise ordinances, PG&E pays the City an “estimated franchise fee” by submitting one quarter of the previous years total franchise fee payments on June 1, September 1, and December 1. PG&E is required to file with the City, by April 1 of the following year, a duly verified statement showing in detail the actual annual gross receipts and franchise fees due for sales of electricity and gas during the previous year. By April 15, PG&E is required to remit the remaining portion of franchise fees due for the previous year (reconciled franchise fees due per annual statement less quarterly payments made in June, September and December).

In March 2003, the City received PG&E’s certified gross receipts reconciliation for calendar year 2002 that indicates the final installment due April 15, 2003 for the electricity franchise fees is $4,428,550 while based on the calculation methodology noted above, the City has received an overpayment of $732,944 for gas franchise fees.

Overpayment of Gas Franchise Fees

As demonstrated by the above analysis, the City was overpaid by $732,944 during fiscal year 2002-03 by PG&E for gas-related franchise fees. Aside from the manner by which “estimated” quarterly fee amounts are calculated and paid, the major factor contributing to the overpayment is a substantial decrease in the market price of gas from 2001 to 2002 by more than 40%.

Given the gas franchise fee over payment the City received during FY 2002-03, discussions have taken place over the past month between PG&E and the Finance Department to resolve the method of repayment to PG&E. Three options were considered:

1. Full repayment immediately by the City issuing a check for $732,944.

2. Over payment to be applied to future quarterly payments until fully paid.

3. Over payment to be applied as an interest free loan to the City to be repaid in four equal quarterly installments by PG&E offsetting an adjustment of $183,236 against the quarterly payment amount the City would have received.

Because there are no refund provisions in the current franchise ordinances, Council action is required to amend the ordinances. Approval of amendments to the franchise ordinances will enable PG&E to provide a $732,944 interest free loan to the City with repayment provisions to be made in equal installments over the next four quarters beginning June 2003.

PUBLIC OUTREACH

Not applicable.

COORDINATION

This memorandum has been coordinated with the City Manager’s Budget Office and the City Attorney’s Office.

COST IMPLICATIONS

Not applicable.

CEQA

Not a project.

SCOTT P. JOHNSON

Director, Department of Finance