Make Them an Offer They Can’t Refuse: Using Utility Franchise Agreement Negotiations to Achieve Clean Energy Goals

January 13, 2021 | Jake Duncan

Cities have been leading the climate movement for four years now – setting historic emissions reductions goals based on local support – and the question now is how they can achieve those ambitions. An aptly named paper, recently published by the National Renewable Energy Laboratory (NREL) in the journal Energy Policy, entitled “Wait, cities can do what? Achieving city energy goals through franchise agreements” shines a light on a powerful clean energy lever.

Cities can make massive strides on energy efficiency through Building Performance Standards, building codes, and other policy actions. But the utilities that generate the power supplying those cities are often investor-owned utilities regulated by the state. This means it can be difficult to transition an entire community to clean energy. Cities have shown initiative by using indirect methods to influence their utility—for example, developing formal city-utility partnerships and engaging their Public Utility Commission (the state agency that regulates utilities). A lesser known, but powerful opportunity for cities to have direct leverage over their utility is when their utility’s franchise agreement comes up for renegotiation.

What Are Franchise Agreements?

Franchise agreements are legal contracts between a municipal government and their utility that grants the utility the exclusive right to serve customers in that jurisdiction. Two of the key items in a franchise agreement are: 1) the length of the contract, and 2) the specification of a franchise fee. The franchise fee is charged to the utility, recovered from customers, and returned to the city government in exchange the utility operating in the public right of way.  

Local governments have an important opportunity to achieve clean energy objectives through three main adjustments in franchise agreement negotiations:

  1. Change the franchise fee and/or specify that a certain portion of it go toward municipal energy projects or related staffing.
  2. Decrease the length of the franchise agreement, creating more flexibility for the local government to change the nature of their relationship with the utility as the energy industry rapidly changes
  3. Incorporate specific clean energy related requirements for the utility to meet in the franchise agreement or an accompanying, but independent, agreement.

Wait, Cities Can Do What?

To investigate the impact clean energy-oriented franchise agreements could have, the authors gathered data on 3,538 municipalities across the US (which is publicly available here) and found that 1,200 cities have franchise renegotiations coming up between 2020 and 2030. They then analyzed three scenarios of the impact from franchise negotiation from real world examples. Their analysis showed that deploying renewables through franchise negotiations could lead to the production of 164-911 TWh of renewable energy by 2030, or enough renewables to power 15.8-87.7 million households.

Minneapolis Funds Climate Action with Franchise Fee

Minneapolis renegotiated their franchise agreement with Xcel Energy in 2014, which resulted in:

  • Reducing the franchise length to 10 years
  • Decoupling the franchise fee from the franchise agreement, allowing the City of Minneapolis more flexibility in adjusting the fee
  • Establishing a separate City ordinance that dictates the funds from the franchise fee be used for clean energy and workforce development programs
  • Creating the Clean Energy Partnership between Minneapolis and Xcel Energy to continue to work together on the clean energy transition

Salt Lake City Negotiations Lead to Bigger Actions

In 2016, Salt Lake City and Rocky Mountain Power settled on a five-year franchise agreement and a separate Joint Clean Energy Cooperation Statement, which outlines shared goals, intended projects, and a process for collaborating. Importantly, this partnership was also instrumental in the design and passage of the Community Renewable Energy Act, which established a clear path for municipalities to procure 100% renewable energy from Rocky Mountain Power and has led to the procurement of new renewable generation to meet this demand.

Conclusion

Franchise agreement negotiation is a rare point of concrete leverage for local governments to establish tangible and lasting clean energy actions with their utilities. Approximately 1,200 municipalities across 30 states have this opportunity in the next decade and should capitalize on this clean energy opportunity!

Local governments interested in using their franchise agreement to advance clean energy and sustainability should:

  • Use NREL’s data set or other methods to find out when your franchise agreement expires
  • Consider how franchise negotiations could be best used in your jurisdiction to meet your energy or climate goals
  • Learn more about the opportunities and challenges of formal city-utility partnerships in our white paper on the subject (written with World Resources Institute)
  • Reach out to me, Jake Duncan, for more information
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