Court to Des Moines, Iowa: Stop Franchise Fee Lawsuit Opt Out Letters

By David Pitt | January 30, 2013

The city of Des Moines, Iowa, has been ordered by a judge to stop asking individuals and businesses to opt out of a lawsuit in which the city was found to have collected illegal fees from gas and electric customers.

The city must return about $40 million to an estimated 100,000 customers of MidAmerican Energy Co. after a Des Moines woman successfully sued, claiming the franchise fees the city collected between 2004 and 2009 were illegal.

Franchise fees have been around since the 1960s and were designed to compensate cities for the administration and regulation of gas and electric utilities in city right of ways. Des Moines, however, began using the money for general expenses as it faced budget shortfalls in 2004. That year, the city boosted the fee from 1 percent to 3 percent. The city raised it again in 2005 from 3 percent to 5 percent.

At a recent hearing, Polk County District Court Judge Joel Novak learned that some businesses, nonprofit organizations and homeowners had been asked by a city official to sign form letters indicating they would voluntarily forego their right to restitution in the case.

Novak has issued an order telling the city to stop.

Some of the individuals said they were asked to sign letters by Des Moines City Councilwoman Christine Hensley. She said Monday she was limited in what she could say because of the ongoing litigation but acknowledged the letters were sent.

“Yes, we were out soliciting input from individuals and we felt that we were exercising our First Amendment rights,” she said. “But we respect the judge’s ruling and are acting accordingly at this point.”

The city argued unsuccessfully in appeals that those eligible for refunds should be allowed to opt out of the case. Refunds are likely to be a few hundred dollars for the average homeowner. Only utility customers of MidAmerican Energy between 2004 and 2009 living in Des Moines are eligible.

About 40 percent of property in the city of Des Moines is owned by government or nonprofit entities that do not pay property taxes, meaning individual homeowners and businesses will bear the burden of repayment.

Attorneys are working out with Novak how the city will refund the money. The city has proposed installment payments or property tax credits for those paying taxes. Novak has asked attorneys to submit their arguments on the repayment method by Feb. 28.

The lawsuit was filed after Lisa Kragnes, of Des Moines, noticed a fee on her utility bill in 2004 and objected to it. She alleged the city was collecting an illegal tax. She filed suit in Polk County District Court and won.

Court documents indicate both sides agree to a refund of $21.3 million for electric customers and $18.6 million for gas customers. Attorney fees, court costs, and interest will be determined later.

 

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