TAMRMS#: B06
9.4
REQUEST FOR DECISION
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Bylaw 22/2024 Natural Gas Franchise Distribution Agreement (1st Reading)
Presented by: Monica Chan, Senior Business Analyst, Financial and Strategic Services
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RECOMMENDED MOTION(S)
recommendation
That Bylaw 22/2024, being a bylaw to authorize the Chief Administrative Officer to execute an agreement with ATCO Gas and Pipelines Ltd. to deliver natural gas to customers within the City of St. Albert, be read a first time.
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SUMMARY
Administration is seeking Council approval to renew a 10-year Natural Gas Franchise Distribution Agreement with ATCO Gas and Pipelines Ltd. at the current fee of 20.3 per cent and to provide first reading to a bylaw that enables Administration to adhere to the procedures of executing the contract and attaining approval from the Alberta Utilities Commission.
The City is required to complete the ATCO submission requirements, including advertising requirements to the AUC, by mid-November 2024.
It is anticipated that Bylaw 22/2024 will return to Council for second and final third reading on or around December 3, 2024, after which point the contract will be able to be fully executed.
ALIGNMENT TO COUNCIL DIRECTION OR MANDATORY STATUTORY PROVISION
The new agreement with ATCO aligns with the MGA sections 45-47.
BACKGROUND AND DISCUSSION
The current agreement is detailed in Bylaw 45/2010, which allows the City of St. Albert to enter into an agreement with ATCO Gas and Pipelines Ltd. for the exclusive right to distribute natural gas within the community. The current agreement commenced in May 2011 for a period of 10 years at a franchise fee rate of 18.8 per cent and is automatically extended until the contract is terminated or renewed by either party.
In 2018, the City elected to increase the fee by 1.5 per cent to 20.3 per cent from 18.8 per cent through motion AR-18-414. As expected, the City’s application for the rate increase through ATCO was approved by the Alberta Utilities Commission (AUC) resulting in the fee of 20.3 per cent which was implemented on January 1, 2019.
Through the procedures set out by ATCO and the Alberta Utilities Commission regulations, it has been determined that the City proceed with passing this bylaw. The first reading of the bylaw is before Council today. In consideration of the renewal process, the earliest that the Natural Gas Franchise Agreement Bylaw may return to Council for second and third reading is December 3, 2024. The process for renewal of the Natural Gas Franchise Agreement follows a defined process that adheres to the Municipal Government Act (MGA) and Alberta Utilities Commission regulations.
The franchise agreement provides a utility company an exclusive right within the Municipal Service Area to:
(a) provide natural gas distribution service pursuant to this agreement and in accordance with the Delivery Tariff,
(b) construct, operate, and maintain the Natural Gas Distribution System; and
(c) use portions of roads, rights-of-way, and other lands owned, controlled or managed by the Municipality which have been designated by the Municipality for such use and which are necessary to provide Natural Gas Distribution Service.
In doing so, the City receives the franchise fee which compensates for the loss of taxable property and in return for providing the company with access to municipal rights-of-way. The written agreement outlines the terms and conditions and standards of operations, identifies both core and supplemental service levels, sets out the franchise fee and procedures to be followed for dispute resolution.
The template agreement is an accepted form of agreement as it was previously developed with negotiations between ATCO, AUMA (Alberta Municipalities) and other parties specifically for the franchise agreement. Municipalities are required to use the template agreement as provided by ATCO which was approved by the Alberta Utilities Commission in 2015 and any deviation from the template is scrutinized by the AUC and may result in the agreement not being approved by the AUC.
Since June 2024, the project team (Executive Leadership, Financial & Strategic Services, Legal, Public Operations & Utilities, Engineering) has reviewed the template agreement and discussed the key terms as well as sections that require revision. In general, the revisions were minor, and the agreement with ATCO is consistent with the current agreement. The term of the new proposed agreement is for 10 years, expiring no later than December 31, 2034.
The alignment of the new agreement with the standard form template is important given the recent changes that were made to the Municipal Government Act and the Gas Utilities Act by the Utilities Affordability Statutes Amendment Act, 2024 (formerly Bill 19). The Utilities Affordability Statutes Amendment Act, 2024 was proclaimed on June 20, 2024, and the changes are intended to provide for more scrutiny of franchise agreement between municipalities and utilities. The changes as a result of the Utilities Affordability Statutes Amendment Act, 2024 include the following:
- New section 45.01 of the MGA which prohibits franchise agreements from providing for the payment of fees that are determined in whole or in part using a price per gigajoule of fuel that varies according to market prices; and
- New section 49(5) of the GUA which states that a franchise granted by a municipality to an owner of a gas utility that has not been approved after the coming into force of Bill 19 (June 20, 2024), will terminate on March 17, 2025.
In order to ensure that franchise agreements can be reviewed and approved by the March 17, 2025 deadline, the AUC has set a filing deadline of December 4, 2024.
Alberta Utilities Commission
The Commission allows municipalities to select a natural gas franchise fee within their franchise agreement anywhere between 0 per cent and 35 per cent. The Alberta Utilities Commission Act sets a fee ceiling of 35 per cent. Through designated processes, Council may seek to adjust the franchise fee, below the ceiling, periodically during the agreement. The 35 per cent capped rate cannot be exceeded without prior approval from the AUC Board.
Comparison to midsize municipalities
Among midsize municipalities, St. Albert’s current 20.3 per cent natural gas franchise fee is on the low end, with high fees levied by Red Deer and Airdrie at 35 per cent and 29.6 per cent, respectively, as shown in Appendix A. Medicine Hat operates a natural gas distribution system and levies a franchise fee, or MCAF, inclusive of a financial return, while adhering to AUC guidelines.
In general, the City of St. Albert manages the natural gas distribution system through a franchise agreement with ATCO, which is similar to other municipalities with franchise fees ranging from 0 per cent to 35 per cent.
Financial Implications of Franchise Fee
In accordance with the City’s Budget and Taxation Guiding Principles
Council Policy, the revenue generated from franchise fees is applied to reduce/offset the Municipal tax levy. The natural gas franchise fee is a flexible revenue source that varies with growth and consumption. Franchise fees are charged on utilities, partially tied to consumption, and therefore encourage conservation.
Over the past five years, the actual natural gas fees have contributed a steady revenue stream to the City, averaging $2,826,546 per year, as indicated in Appendix B. During this period, the typical resident pays an annual average of $117.10 based on an average consumption of 115 gigajoules, or $9.76 per month.
The 2024 natural gas franchise fee is projected to meet the budget of $3.1 million. For budget 2025, the City is estimating a fee revenue of $3.3 million based on updated estimates provided by ATCO in September, which is higher by $0.2 million or an increase of 6 per cent compared to the current year budget.
Conclusion
Administration recommends that Council proceed with a new 10-year natural gas franchise agreement with ATCO at the current fee of 20.3 per cent. This continues to provide the City with a stable source of franchise fee revenue while adhering to regulations pertaining to utilities as well as avoiding any discrepancies between City operations and ATCO operations.
STAKEHOLDER COMMUNICATIONS OR ENGAGEMENT
Advertisements in St. Albert via the St. Albert Gazette of the City’s intent to proceed with the renewal of the contract with ATCO.
Complete the Form of Application for submission to ATCO and AUC.
IMPACTS OF RECOMMENDATION(S)
Financial:
See above for the outlined financial implications.
Compliance & Legal:
The MGA provides municipalities the right to grant a right to a person to provide a utility service in all or part of the municipality and to use the municipality’s property for the construction, operation, and extension of a public utility in the municipality for not more than 20 years (MGA, section 45). Before the agreement is made, amended, or renewed, the agreement must be advertised and approved by the AUC.
The franchise fee cannot be determined in whole or in part using a price per kilowatt hour or per gigajoule that varies according to market prices. The City of St. Albert is not in contravention of this requirement because our franchise fees are not set doing this methodology.
The City will proceed with advertisement of Bylaw 22/2024, and the agreement will be sent to the AUC for approval after first reading of Bylaw 22/2024, in order to comply with the requirements of the MGA.
The existing bylaw 45/2010 will be repealed upon the passing of new Bylaw 22/2024.
Program or Service:
None at this time.
Organizational:
None at this time.
Risks
None at this time.
ALIGNMENT TO PRIORITIES IN COUNCIL’S STRATEGIC PLAN
The natural gas franchise fee is an alternative, stable, and growing source of revenue.
This aligns with the financial sustainability strategic priority contained in the 2022-25 Council Strategic Plan.
Initiative aligned with Strategic Plan:
Not applicable.
ALIGNMENT TO SERVICE DELIVERY
Not at this time.
IMPACTS OF ALTERNATIVES CONSIDERED
If Council does not wish to support the recommendation, the following alternatives could be considered:
1. Council may elect to proceed with the new agreement AND increase the franchise fee. Should Council wish to purse this alternative, Bylaw 22/2024 would need to be given first reading, and then amended after first reading to incorporate the new franchise fee. The following motions would be recommended after first reading.
1. That section 5 of Schedule A of Bylaw 2/2024 be amended to increase the franchise fee from 20.3% to X%.
2. That notice be provided to ATCO Gas and Pipelines Ltd. no later than October 1, 2024 of the City’s intent to increase the franchise fee effective January 1, 2025.
3. That Administration execute and complete all required documentation and advertising requirements to enable consideration of approval of the franchise fee increase by the Alberta Utilities Commission.
Financial:
A 1% increase in the franchise fee would equate to approximately $160,000 in additional revenue for the City equating to a 0.1% decrease in municipal taxes.
Compliance & Legal:
The AUC allows municipalities to select a natural gas franchise fee within their franchise agreement anywhere between 0 per cent and 35 per cent. The Alberta Utilities Commission Act sets a fee ceiling of 35 per cent.
Administration will proceed with all AUC processes, regulations and required advertising to enable an increase in franchise fees effective January 1, 2025.
Given the new changes made by Bill 19, all changes to franchise fees are going to be scrutinized more closely by the AUC, and there is a risk of increased time being added to the process.
Program or Service:
None at this time.
Organizational:
None at this time.
Risks
None at this time.
2. Do nothing.
Financial:
Given the new changes made to the MGA and the GUA, if the new agreement is not approved by Council and the AUC, it will be terminated on March 17, 2025. The City would not receive any franchise fees after the termination of the current agreement.
Compliance & Legal:
Since this is a new agreement that has not yet been approved since the proclamation of Bill 19, if the new agreement is not approved by the AUC, the current agreement will be terminated on March 17, 2025.
Program or Service:
None at this time.
Organizational:
None at this time.
Risks
None at this time.
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Report Date: October 1, 2024
Author(s): Monica Chan
Department: Financial and Strategic Services
Department Director: Anne Victoor
Managing Director: Diane McMordie
Chief Administrative Officer: Bill Fletcher