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Des Moines to take franchise fee to Supreme Court

David Pitt, Associated Press

DES MOINES, Iowa (AP) -- The city of Des Moines will petition the U.S. Supreme Court to hear its franchise fee case, which could cost the city between $30 million and $40 million.

The Iowa Supreme Court ruled in March that the city must refund a portion of the franchise fee it collects on residents' gas and electricity bills because some of the fees are unlawful.

City attorney Jeff Lester said Thursday that the appeal will be filed by the July 5 deadline.

Justices may choose to take the case or deny the petition, and Lester acknowledged that few such petitions are accepted.

"We're not naive about the chances of that happening but we think that it's important enough that those issues should be reviewed by the court," said Lester, who also noted that former state Supreme Court justice and Des Moines attorney Mark McCormick is helping draft the appeal.

The case is about the permissible use of franchise fees, which 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, boosted the fee from 1 percent to 3 percent in 2004 as it faced a budget shortfall and put the money it its general fund. The city raised it again in 2005 from 3 percent to 5 percent.

Des Moines has been collecting about $12.6 million a year from the franchise fee. The state Supreme Court concluded the city can collect about $1.5 million a year for gas utilities and about $2.1 million a year for electric utilities. Any amount collected above that must be refunded.

The Iowa Legislature passed a bill this year that would have allowed the city to increase its franchise fee further to pay off the court judgment if city voters approved, but Gov. Terry Branstad vetoed it.

Hearings are scheduled in Polk County District Court, where an exact refund will be determined for an estimated 100,000 utility customers in Des Moines that paid the additional franchise fee. A district court judge also will decide on any restitution amount.

If Des Moines does not win on appeal, it likely will be forced to increase property taxes to afford to pay the refunds, with homeowners and for-profit businesses taking on most of the burden. About 40 percent of property in Des Moines is owned by government or nonprofit entities that do not pay property taxes.

The initial lawsuit was filed by Des Moines resident Lisa Kragnes in 2004 after she questioned the franchise fee on her bill. A Polk County District Court judge ordered the city to refund the money in 2009, saying it was overcharging customers and had collected what amounted to an "illegal tax."

The case has twice gone to the Iowa Supreme Court on appeals from the city.

Brad Schroeder, the attorney representing Kragnes and the plaintiffs, said the appeal means the city continues to refuse to acknowledge that it did something illegal.

"Instead, they're looking for someone to bail them out," he said. "We do see this as another opportunity for the city to choose to delay resolution of the case, to delay getting refunds issued to the citizens of Des Moines from whom these moneys were wrongly taken."