Opinion ID: 3207078
Heading Depth: 2
Heading Rank: 4

Heading: “Without a Franchise”

Text: That leads us to the second part of our inquiry: What did the legislature intend when it used the phrase “without a franchise”? “Franchise” has a fairly well-defined meaning within the context of municipal law. In its decision, the Court of Appeals quoted and relied on an extremely broad definition of franchise: “ ‘[F]ranchises are special privileges conferred by the government on individuals, and which do not belong to the citizens of the country generally of common right.’ Elliott v. City of Eugene et al., 135 Or 108, 113, 294 P 358 (1930). See also John Bouvier, 2 Bouvier’s Law Dictionary and Concise Encyclopedia 1299 (3d ed 1914) (defining franchise as ‘[a] special privilege conferred by government on individuals, and which does not belong to the citizens of the country generally by common right’); Black’s Law Dictionary 515 (1889) (using same definition and adding, ‘[i]n this country, it is a privilege of a public nature, which cannot be exercised without a legislative grant’).” Northwest Natural Gas Co., 264 Or App at 44-45. However, the 1914 Bouvier text also indicated that there were differences between English common law and American law, and that American “franchises spring from contracts between the sovereign power and private citizens, made upon a valuable consideration, for purposes of public benefit as well as of individual advantage.” 2 Bouvier’s Law Dictionary at 1299 (citing 4 Thomp. Corp. § 5335 (emphasis added)). That definition is similar to one found in another early dictionary, defining a franchise as: 328 Northwest Natural Gas Co. v. City of Gresham “A species of incorporeal hereditament[12] springing from a contract between the state and a private citizen or citizens, made upon valuable consideration, for purposes of public benefit as well as individual advantage.” James A. Ballentine, Law Dictionary with Pronunciations 525 (1930) (emphasis added). In McQuillin’s treatise on municipal law, the author states: “The term franchise as it is ordinarily used in the decisions and by text writers, and as used in this chapter, means the right granted by the state or a municipality to an existing corporation to do certain things that a corporation or individual otherwise cannot do, such as the right to use a street or alley for a commercial or street railroad track, or to erect thereon poles or string wires for telegraph, telephone, or electric light purposes, or to use the street or alley underneath the surface for water pipes, gas pipes, or other conduits. Eugene McQuillin, 12 The Law of Municipal Corporations § 34:3, 24 (3d ed 2006) (McQuillin). The treatise goes on to note that, under the law of some jurisdictions, a city’s grant of such privileges may be considered a mere license, but in most jurisdictions are considered franchises. Id., § 34:4 at 25; 34:6 at 31-32. It further provides: “When the right to use the streets is granted and accepted and all conditions imposed incident to the right performed, it ceases to be a mere license and becomes a valid contract   . However, until an ordinance granting a franchise is accepted, the franchise lacks the essential elements of a contract. It is a mere proposition.” Id. § 34:5 (emphasis added). Thus, the view expressed in McQuillin is that the type of arrangement whereby a city allows a utility to use its streets for purposes of providing utility services is generally known as a franchise, although it might be a mere license. In sum, the more prevalent use of the term “franchise” is to describe a type of agreement between a municipality and a utility—something that is granted and accepted—that ceases to be a mere license and becomes a valid contract. 12 An incorporeal hereditament is “a right issuing out of a corporate thing (whether real or personal) or concerning, or annexed to, or exercised within, the same.” James A. Ballentine, Law Dictionary with Pronunciations 628 (1930). Cite as 359 Or 309 (2016) 329 The Court of Appeals in this case looked to much of the same source materials, and noted, based in part on the case law discussed below, that under Oregon law (and consistent with the majority rule described in McQuillin), “permission given by municipal ordinance to a private corporation to exercise some special privilege within the city, pursuant to an express delegation of legislative authority, is a grant by the state whereby the right conferred becomes a franchise and not a license.” Northwest Natural Gas Co., 264 Or App at 45 (quoting Western Union Tel. Co. v. Hurlburt, 83 Or 633, 638, 163 P 1170 (1917)). However, it went on to conclude, nonetheless, that if “franchise” was meant to refer only to a traditional contractual arrangement, “then ORS 221.420 would not also have referred to ordinances ‘or otherwise’ as means by which a city could prescribe the terms and conditions under which a public utility could occupy city streets.” Northwest Natural Gas Co., 264 Or App at 47. The Court of Appeals’ analysis suggests that “franchise” has a broader meaning than “contract” because cities may make arrangements with utilities not only through contracts but by ordinance and otherwise pursuant to ORS 221.420. Therefore, it reasoned, “without a franchise” as used in ORS 221.450 means, in essence, without an arrangement with the city by contract, ordinance or otherwise—including a licensing arrangement such as that set forth in the Gresham ordinances described above. That reasoning seems to assume that if “franchise” means something broader than a traditional “contract” and is something that can be achieved by way of an ordinance, then it necessarily must encompass the type of ordinances at issue here, setting forth a licensing fee scheme. While the Court of Appeals’ premise seems undoubtedly correct—a franchise is not always created by way of a traditional contract—its conclusion that a “franchise” is created by way of ordinances authorizing a city to issue licenses requires closer examination. It is clear, from Oregon cases as well as numerous cases discussed in McQuillin, that franchises can be created by ordinance instead of by a traditional contract. It is 330 Northwest Natural Gas Co. v. City of Gresham less clear that ordinances that establish generic licensing schemes, such as the one at issue here, necessarily create a franchise whenever a license is issued. Historically, it was a common practice for a municipality to enact an ordinance granting a franchise to a specific utility, which, as noted above, became a contract when accepted by the utility. See, e.g., Hillsboro v. Public Service Commission, 97 Or 320, 324-25, 187 P2d 617 (1920) (city enacted an ordinance granting a franchise, and “when the franchise was granted by the city and accepted by the public service corporation, it was a valid contract”); Newsom v. City of Rainier, 94 Or 199, 202, 185 P 296 (1919) (concerning a “franchise embodied in” an ordinance that specifically related to the provision of water services by the defendant and contained provisions for termination); Benbow v. The James Johns, 56 Or 554, 556, 108 P 634 (1910) (discussing a city ordinance granting a franchise to a ferry transportation company, reserving to the city a percentage of the earnings). In fact, it is not clear that any of the municipal franchises discussed in pre-1931 Oregon cases were created by a licensing scheme such as the one at issue in this case, as opposed to ordinances or resolutions that granted a specific franchise to a specific utility company by way of agreement.13 Finally, our prior case law, while not specifically addressing the meaning of franchise, does state that ORS 221.450 concerns franchise agreements, thus indicating a narrower view of “franchise” than that taken by the Court of Appeals. In US West Communications, 336 Or 181, we addressed related but substantially different statutes concerning a city’s imposition of a privilege tax on a telecommunications carrier. In doing so, we observed: “If certain conditions are met, a city either may enter into a franchise agreement that determines the ‘charges and fees upon which any public utility    may be permitted to occupy the streets, highways or other public property within such city,’ ORS 221.420(2), or may impose a privilege tax ‘for the [utility’s] use of [the] streets, alleys or highways’ within the city, ORS 221.450.” 13 The record in this case discloses that prior franchise agreements between some of the utilities and the City of Gresham were achieved by ordinance, as well. Cite as 359 Or 309 (2016) 331 Id. at 183 n 1 (brackets in original; emphasis added). Although the parties recognize that that statement is dictum, the utilities argue that it nonetheless evinces a sound understanding of the manner in which the statutes were meant to work. That statement from US West Communications, although dictum, was implicitly endorsed in our recent decision in Rogue Valley Sewer Services. Rogue Valley Sewer Services primarily concerned an issue somewhat similar to that raised by Rockwood PUD in its alternative argument— whether a city could impose a “franchise fee” on a provider of sewer services. The plaintiff in that case, unlike the utilities in the present case, was not among the utilities specifically included in ORS 221.420(2)(a) and ORS 221.450. The plaintiff argued that ORS 221.420 and ORS 221.450 established the exclusive basis on which a city could impose fees on utilities for use of rights-of-way and therefore the city’s “franchise fee” was preempted. We stated: “[T]he legislature has provided a framework for cities to collect a franchise fee from utilities, both public and private, operating within their rights-of-way. See ORS 221.420; ORS 221.450. Where cities and utilities have not entered into an agreement for a different fee arrangement, the legislature provides for a five percent fee. ORS 221.450.” Rogue Valley Sewer Services, 357 Or at 450 (emphasis added). We concluded that nothing in those statutes indi- cated a legislative intent to preempt a city’s imposition of a franchise fee on a provider of sewer services. In the course of addressing the plaintiff’s argument, we quoted from the legislative history of a 1987 amendment to ORS 221.45014 that sheds some light on the legislative intent of ORS 221.450: “The legislative history of House Bill (HB) 3021—the 1987 revision to ORS 221.420 and ORS 221.450—suggests that the legislature was told that the statutes would operate so that ORS 221.450 functioned as a ‘penalty clause,’ such that, 14 The 1987 amendments to the statute are discussed more fully below. 359 Or at 339-342. 332 Northwest Natural Gas Co. v. City of Gresham “ ‘if    [y]ou, as a private utility    don’t sit down and negotiate a franchise regulation ordinance or agreement so that we’re working together, then you’re going to pay more. You’re going to pay five percent. If you come in and get a franchise, and you sit down at the table    and we mutually regulate it together, basically, then [you pay less].’ “Tape Recording, House Committee on Environment and Energy, HB 3021, Apr 22, 1987, Tape 122, Side B (statement of Larry Shaw).” Rogue Valley Sewer Services, 357 Or at 452 (brackets and ellipses in Rogue Valley Sewer Services; emphasis added). That legislative history, although scarcely definitive, does suggest several things. First, it suggests that the legislative intent we have gleaned regarding the initial 1931 enactment—that it was not to establish what a city could charge to utilities for use of rights-of-way but to assist cities in negotiating agreements with utilities for their use of rights-of-way—had not altered over the course of half a century. That is, the assumption of Shaw’s testimony was that a five percent “penalty” privilege tax created a sufficient incentive for utilities to work out franchise agreements with the cities they served. Second, the broad phrase “franchise regulation ordinance or agreement,” used by Shaw in his testimony quoted above, does not suggest an extremely narrow view of the term “franchise” as meaning a traditional “contract,” but it does suggest, particularly given that it was used with the terms “negotiate” and “mutually regulate it together,” what our case law has suggested: The word “franchise” as used in ORS 221.450 refers to an agreement. See Rogue Valley Sewer Services, 357 Or at 450; US West Communications, 336 Or at 183 n 1. On the other hand, another statement made by Shaw to the 1987 committee considering the amendments to ORS 221.450 could support a conclusion that Shaw did not make any distinction between a fee imposed through a negotiated franchise agreement and a licensing fee. As we noted in Rogue Valley Sewer Services, the 1987 amendments came about because “the legislature was reacting to the then-recent circuit court decision in Columbia River People’s Utility District Cite as 359 Or 309 (2016) 333 v. City of St. Helens et al, No. 85-2236 (Columbia County Circuit Court, July 15, 1986). In that case, the circuit court held that ‘the legislature has declared by inference that People’s Utility Districts are not subject to franchise fees (excise taxes) such as defendant cities desire to impose.’ ” 357 Or at 456 n 4. The 1987 legislation amended ORS 261.305, governing PUDs, and added a provision specifically allowing them to enter into franchise agreements with cities, as well as adding PUDs to ORS 221.420 and ORS 221.450. Shaw was the attorney who represented St. Helens in the underlying litigation. He explained some of the background of the dispute to the committee as follows: “[U]nder the arrangement before this lawsuit    both private utility companies that sell electricity and PUDs that sell electricity pay the same three and a half percent of gross revenue franchise type of fee, whatever you call it. And that amount as determined in a 1967 ruling by the PUC commissioner to decide what would be a fair amount. “And one city, I believe Portland, charges a five percent licensing fee and therefore, as a result of that, PUC commission has to consider the one and a half percent additional as a tax, and the three and a half percent is considered a franchise fee.” Tape Recording, House Committee on Environment and Energy, HB 3021, Apr 22, 1987, Tape 122, Side B (statement of Larry Shaw) (emphasis added).15 Thus, although Shaw spoke to the committee at one point about franchises as negotiated agreements, he also appeared to draw no distinction, at least for purposes of describing the PUC’s treatment of fees charged by cities to utilities, between franchise fees and licensing fees. That legislative history is, ultimately, not particularly helpful here, both because the legislature was not considering any nuanced difference between franchises and licenses at that point, and because it does not point 15 The PUC order to which Shaw was referring may be what is currently codified at OAR 860-022-0040(1), (6). It provides that “all business or occupation taxes, license, franchise or operating permit fees, or other similar exactions” on certain utilities are allowed as operating expenses for rate-making purposes to the extent that they do not exceed 3.5 percent, and to the extent such fees exceed 3.5 percent “such excess amount shall be charged pro rata to energy customers within said city and shall be separately stated on the regular billings to such customers.” 334 Northwest Natural Gas Co. v. City of Gresham definitively toward a broader or narrower view of what the term “franchise” was meant to cover in ORS 221.450. As the city urges and as the Court of Appeals held, the term “franchise” sometimes may carry an extremely broad meaning of any “special privileges” conferred by a government entity that do not belong to the citizens in general. Northwest Natural Gas Co., 264 Or App at 44. Under that broad definition, a utility operating under a license might be said to have such a “special privilege.” On the other hand, we believe that the weight of the authority cited above supports a conclusion that the term often is used more narrowly to describe negotiated agreements between a government entity and another entity, for their mutual advantage. 359 Or at 326 (quoting 2 Bouvier’s Law Dictionary 1299, Ballentine’s Law Dictionary with Pronunciations at 525). Such a negotiated agreement may take the form of a contract or an ordinance granting a franchise that, when accepted by the utility, essentially functions as a contract. See, e.g., McQuillin, 12 The Law of Municipal Corporations § 34:5; Newsom, 94 Or at 202. Moreover, when the legislature originally enacted ORS 221.450, it used the word “franchise” alone in that statute, but in the two related statutes that were part of the same enactment, it used the phrases “grant, privilege or franchise,” and “franchises, privileges or permits.” Or Laws 1931, ch 234, §§ 2, 3. Had the legislature intended the word “franchise” to mean any “special privilege,” as the Court of Appeals held, it seems unlikely that it would have felt the need to include the word “privilege” (or “grant” or “permit” for that matter) in the other subsections of the act. Additionally, as noted, in both of the cases in which this court has touched on the meaning of ORS 221.450, we have indicated that it concerns franchise agreements. Rogue Valley Sewer Services, 357 Or at 450; US West Communications, 336 Or at 183 n 1. It appears that the statute was intended to encourage utilities to negotiate franchises with cities, or be penalized by having to pay a non-negotiated “privilege tax.” The text read in context, as well as our case law, both point to the conclusion that the legislature, in using the term “without a franchise” in ORS 221.450, was referring to a negotiated franchise agreement. In sum, we conclude that the Court of Cite as 359 Or 309 (2016) 335 Appeals erred in reading “franchise” so broadly as to encompass the type of license fee established by GRC 6.30.110 and implemented by Gresham Resolution 3056.16 To summarize: (1) As to the meaning of “privilege tax” as used in ORS 221.450, we conclude that the “license fee” established by the City to raise revenues primarily to fund city-wide services such as police and fire departments, falls within the purview of a “privilege tax” as that term is generally used in municipal law and has specifically been used in Oregon law; (2) As to the meaning of “without a franchise” as used in ORS 221.450, we conclude that the legislature used the term “franchise” to describe a negotiated agreement between a utility and a city that functions as a contract. Neither the text of ORS 221.450 viewed in context or Oregon case law suggests that “franchise,” as used in this context, should be read so broadly as to encompass a licensing scheme that involves the unilateral imposition of fees.