Gas and Electric Franchise Fee Litigation
NOTE TO CLASS MEMBERS:
This page of the Website will be used by the Plaintiff and Plaintiff Class Counsel to give the class periodic updates of the case. Please review this as you may want. You can always refer to the Pleadings, Motions and Orders page for officially filed or served significant documents in the case and the first page of the website for the Court Ordered Notice given to class members.
9-30-2009
Since the last update, the Court has ruled on the post trial motions filed by both parties. The Judge denied both parties’ post trial motions including the City’s fourth attempt to decertify the class or, alternatively, to have the class subdivided. The Rulings are now on this website's pleadings and rulings page. Appeal is likely now to occur.
8-18-2009
A ruling has been entered by the Court in this case. The Court has determined that the City of Des Moines violated the law by imposing what amounts to an illegal tax on the electric and gas rate payers within the City of Des Moines. The Judge has ruled that the cost incurred by the City for administration, regulation and supervision of the activities of MidAmerican Energy under their franchises did not exceed $1,574,046.00 for gas and $1,575,194.00 for electric, respectively. The Court has ordered refunds for amounts collected in excess of said amounts prior to the law change passed by the Iowa Legislature and enacted into law on May 26th, 2009. The specific amount of said refunds will be determined by the Court in subsequent hearing(s) to be held in the future.
Currently, both parties have filed post trial motions which are being considered by the Court. The Plaintiff anticipates the Court will rule on the pending motions sometime in August of 2009.
The City has publicly indicated it will appeal the decision of the Trial Court. If appeal occurs, it is likely that individual refunds will not be determined until after the case is considered and ruled upon by the Iowa Supreme Court. The District Court Ruling, together with post trial motions and briefs filed by both parties, are available in the Pleadings, Motions and Orders sections of this website. We will endeavor to keep you updated as the case progresses so please check this site periodically.
5-15-2009
The case proceeded to trial commencing October 27, 2008 and concluded November 13, 2008. A significant amount of evidence was introduced by both sides including the testimony of the experts retained by both parties. The exhibits introduced at trial are available on the Pleadings, Motions and Orders page of this site. Following trial, the Court asked both parties to present for consideration detailed briefs outlining the positions of the respective parties based on the evidence presented at trial. The trial transcripts were transcribed and provided to the attorneys for the respective parties in Mid March 2009 for the purpose of preparing detailed briefs. Both Parties submitted their briefs to the Court on April 2, 2009. The Briefs submitted by both parties are available on the Pleadings, Motions and Orders page of this site. We now await the ruling of the Court which is anticipated to be entered sometime in May, 2009.
10-14-2008
Kragnes v. City of Des Moines FAQ is now Available!
We have collected the most frequently asked questions regarding Kragnes v. City of Des Moines into a PDF file!
Click HERE and HERE for more information!
9-12-2008
INTRODUCTION
If you are a gas and/or electric utility customer in the City of Des Moines (or have been one at any time since at least 1999), you have paid gas and/or electric franchise fees to the City of Des Moines. These are billed to you on your billings received from MidAmerican Energy Company and then paid over to the City of Des Moines. The extent of the City of Des Moines’ continued additional impositions on the costs of critical gas and electric services will be decided by this case. This page is not intended as a substitute for the Court-ordered Class Action Notice that you received, but is instead a brief summary of the case from the point of view of the Plaintiff. More specific information, argument and the Court orders can be found in the Pleadings, Motions and Orders link on this website.
SUMMARY
In the Spring of 2004, the Des Moines City Manager’s Office and City Council began the process of seeking to raise the City’s longstanding 1% “franchise fee” on Mid-American gas and electric bills. They cited their wish to raise more general revenue, but acknowledged residents’ general opposition to increased taxes. In response to substantial increases in energy costs, the Iowa General Assembly had recently began the stepped repeal of the former statewide 5% tax on such residential bills as a means of affording tax relief to the residents of Iowa. The City discussed raising the franchise fee to 6%, effectively proposing to negate the Legislature’s intent and replace the 5% tax with an even higher franchise fee.
On July 24, 2004, Des Moines resident Lisa Kragnes filed suit against the City, claiming that it didn’t have authority to charge such a tax, regardless of what the City was calling it, i.e. “fee” or “tax,” and asking the Court to certify her case as a class action on behalf of everyone else who might be made to pay the illegal “fee.”
In a matter of months after Kragnes’ suit was filed, the City responded to this claim of illegality by denying her claim and then also raising the fee, first to 3%, and then to 5%, where it remains today.
In January of 2006, Polk County District Court Judge Michael Huppert found in favor of Kragnes, ruling that Kragnes was correct in her assertion that – to the extent the fees the City was collecting were used for general revenue purposes and were not related to the City’s specific costs incurred in regulating the gas and electric utilities’ use of the right-of-way – the “fee” amounted to a tax which the City did not have authority to collect.
The City opted not to reduce or suspend the fee. Instead, it appealed to the Iowa Supreme Court, continuing to assert it had the right to impose whatever additional amount it wanted on gas and electric services that were provided to its residents.
In May of 2006, the Iowa Supreme Court held that Kragnes was correct – i.e. that the City was not free to just charge a fee in any amount the City wanted. The Iowa Supreme Court remanded the matter back to the District Court for further proceedings and trial on the issue of what percentage of the fee, if any, the City could prove was actually related to costs the City incurred in regulating MidAmerican’s use of the right-of-way in providing gas and electric service to the residents of Des Moines.
The matter was subsequently certified as a class action, and is set for trial in District Court in Polk County beginning on October 27, 2008.
The Iowa General Assembly has historically prohibited cities like Des Moines from imposing franchise fees on critical gas and electric utilities as revenue generating measures. As costs for these necessary services continue to increase, ensuring that Des Moines complies with the law is of great importance to utility payers.
If the Court finds that the City is collecting more through the fee (approximately $12.2 million annually at this point) than its costs incurred in administering and regulating MidAmerican’s use of the right-of-way in providing gas and electric service, the City may be ordered to stop collecting the excessive amount and to refund the portions it has already collected illegally. The City has had ample opportunity to eliminate or reduce the fee and otherwise plan for potential refunds, both before and during the pendency of this case. Kragnes is hopeful that defeating the City’s expansive tax efforts in this manner will ensure greater scrutiny and accountability in the City’s taxing policies in the future.
FURTHER LEGAL BACKGROUND
In order to understand the nature of the case, you may be interested in the longstanding law in this state governing the authority of cities to charge a franchise fee. Numerous of the pleadings and decisions in this case discuss this in detail. For those, please refer to the Pleadings, Motions and Orders portion of this Website. In this case the fee in question concerns a franchise fee on the gas and electric bills for the citizens of the City of Des Moines. For a detailed legal analysis by the Iowa Supreme Court, see Kragnes v City of Des Moines, 714 N.W. 2d 632 (Iowa 2006). (Click link to read Iowa Supreme Court case).
The Constitution of the State of Iowa provides in Article III Sec 38A: Municipal Corporations are granted home rule power and authority, not inconsistent with the Laws of the general assembly, to determine their local affairs and government, except that they shall not have the power to levy any tax unless expressly authorized by the general assembly. The Iowa legislature codified this restriction on cities in Iowa Code §364.3(4).
The difference between a tax and a fee under the law is therefore important in the law. The Iowa Supreme Court has long held a tax is a charge to pay the cost of government without regard to special benefits conferred. Consistent with this definition, the regulatory and service fees permitted under Iowa law are based on a special benefit conferred on the person paying the fee. In the regulatory context, fees enable the government to administer a particular activity or occupation to the peculiar benefit of those engaged in that activity or occupation. Therefore, fees designed to cover the administrative expense of regulating a particular activity, occupation, or transaction are not taxes. This has been the law of this state for years. Consequently, a franchise fee must be calculated to cover the cost of regulating the franchised activities.
When this case was filed, the City of Des Moines openly admitted that it was charging a fee without regard for the administrative expense it was incurring in regulating the service. In fact, it admitted it had never calculated such expenses because it said it believed it was unnecessary to do so for purposes of charging a franchise fee. Having been told by the Supreme Court that that approach is illegal, the City is now claiming after-the-fact that its recently-calculated expenses are substantial. Both parties have hired experts to testify on the matter. This issue will be determined by the Court once this matter proceeds to trial.