All electrical, gas, and telecommunications companies which operate within the city limits have Franchise Agreements with the City which outline how they are allowed to use the publicly owned rights of way to place their infrastructure.  In exchange for allowing this use, the city charges these utilities a Franchise Fee, which helps defray the costs of working with/around that equipment in developing and maintaining City Streets.

The combined Franchise Fee and Payments in-lieu of taxes (FF/PILT) charged to electricity providers within the city is 7% of the utility's gross revenues.  That amount is largely passed through directly to the customers.  Therefore, a customer who's total cost of receiving electricity in a month is $100, their total bill ends up being $107 to the electric utility.  The electric utility collects all of their billing monthly, and once per quarter, remits an amount equal to 7% of their gross revenue to the City for it's use in managing/maintaining the public's rights of way.

Resolution 2209 makes it City Policy to allow very large power customers within the city to be reimbursed for all of the FF/PILT that they paid to their electric utility over $750,000 in a calendar year per developed parcel.  Large customers who operate on multiple developed parcels within the city would have an upper-end limit at $1.5 million per year.  Those amounts will be indexed annually with inflation beginning January 1, 2023.  This policy will sunset 12/31/2029; at which point, future councils may choose to renew, amend, or allow the policy to sunset entirely.

It should be pointed out that no current power customer within the city comes close to paying $750,000 in electricity FF/PILT within a calendar year.  For reference, the total electricity FF/PILT revenue received from all three electric utilities with facilities within the city in FY '21 was only $950,000 across all ~5,500 customer accounts.  Therefore, a very large customer who hits the $750,000 threshold, would single-handedly increase city-wide FF/PILT revenue by 79%.

The value of this incentive depends entirely on the amount of energy purchased.  No reimbursements would be issued until the customer purchased at least $10,714,275 in electricity in one year.  All FF/PILT paid on power purchased after that would be refunded.  Therefore, if a customer purchased $15,000,000 in power in a year, they would pay $1,050,000 in FF/PILT to their utility, who would remit those to the city on a quarterly basis.  At the end of the year, the customer would have the opportunity to make application to the City to be reimbursed for all FF/PILT they paid over $750,000 by proving their power purchases.  In this event, the cash value of this incentive would be $350,000, and result in an effective FF/PILT rate for the customer after final reconciliation of 5%; which would return it to what the rate would have been for that customer in 2017.

Council will remember that, in 2017, it moved to raise FF/PILT from 5% to 7% citywide, in order to help fund maintenance of City Streets in our Right of Way.  At the time, it was directly questioned by Council about the impact of adjusting this rate on future large scale economic development.  At the time, I indicated that, in the event of a large scale power customer finalizing plans to locate within the City, it would be quite simple to create a bulk-discount incentive which would eliminate the impact of raising rates, while still resulting in a net increase in FF/PILT revenue to the City and stimulating job growth in the community.  That theory was generally accepted by Council at the time.

It is important to understand the importance of reducing the electricity FF/PILT from 7% to 5%, in that example of a business buying $15M in electricity in a year.  To the lay-person, 5% versus 7% may not seem all that important, but digging in, we can see what it means at the margins.

It is a well known fact that very large industrial power customers are attracted to the region because of the low power costs.  Specifically, they will choose to locate within Umatilla Electric's service area versus Pacificorp's service area because the marginal cost of power is in the range of 30% more expensive through the investor-owned Pacificorp.  Now, it is important to understand that counties are precluded from charging any franchise fee at all.  Therefore, the FF/PILT paid on developments outside of city limits is 0%.  So, from a marginal standpoint, a 7% FF/PILT on power within city limits has just shrunk the cost differential between UEC and Pacificorp by 7%.  Now there is only 23% of costs for the company to work with in choosing a Hermiston site over a site outside of city limits in Pacificorp territory.  In the event that it is a site in UEC territory outside of City Limits which is relatively competitive on all other development factors, then a 7% FF/PILT just made the Hermiston site 7% more expensive for one of their largest expense categories.

The policy proposed in Resolution 2209 is a temporary economic development incentive which recognizes the fact that the economics of a utility's impact on the Right of Way don't scale equally to the amount of power a customer consumes.  Specifically, this economic development policy is tailored in such a way that it realistically only impacts very large scale industrial development in the South Hermiston Industrial Park; which will otherwise have relatively minor impacts to City Rights of Way.  The impact is relatively minor because the necessary, logical, routing for power infrastructure large enough to serve a customer who qualifies for this, is to come in from Feedville Road (a County-owned right of way outside of the City Limits and UGB) directly to a site in the SHIP.  Relatively speaking, a route like this has an exponentially lower per-foot impact on the City Right of Way relative to power purchased than something like a 100-home subdivision.

Additionally, from a regional cooperation/parity perspective, City Staff has coordinated with the City of Umatilla on this issue.  The City of Umatilla has had an industrial development incentive for their FF/PILT for many years.  Prior to April, 2020, the City of Umatilla had a cap in place with their electric utility that the utility would stop collecting franchise fees once they eclipsed $1 million in FF/PILT collections city-wide in a year.  That has now been adjusted to a cap of $1.5 million in a year through 12/31/2029.  It should be noted that there are currently three very large power customers located within the City of Umatilla; which when combined with their city-wide base-load, creates an effective cap of <$500,000 per very large customer; and effectively creates a 0% franchise fee on any new developments through 2029.

Due to the differences between the size of "base loads" between Hermiston and Umatilla, as well as other factors, it simply makes more sense to structure our incentive as a reimbursement after fees have been paid to the City, than to have the utility stop collecting once a certain threshold is hit.  Additionally, structuring the agreement this way ensures that, come 2029, the City will have verified power consumption totals in the event that a customer wishes to request this incentive continue beyond 2029.  Locking the sunset date of this policy with the sunset date of the City of Umatilla's policy also helps ensure regional parity is maintained to eliminate wasteful competition amongst localities.

1.  Adopt Resolution 2209

2.  Reject Resolution 2209

3.  Table Resolution 2209 with recommendations