After Having BWL Franchise Fees Struck Down In Court, Council Adopts New Legal Strategy

East Lansing City Council on Tuesday evening unanimously approved a legal strategy — discussed in closed session a week ago — regarding the class-action lawsuit that successfully challenged the City’s franchise fee assessed on Lansing Board of Water and Light customers in East Lansing. 

The specific legal strategy for the City remains under wraps due to attorney-client privilege. The resolution that Council approved last night only stated that, “the City Council of the City of East Lansing resolves to approve the recommendations of the attorney representing the City in the matter of Heos v. City of East Lansing, Ingham County Case No. 20-199-CZ, on April 12, 2022.”

However, Council’s adoption of a legal strategy suggests that the City might continue to pursue legal action over the franchise fee, which generates approximately $1.4 million in annual revenue.

The franchise fee, enacted by the City in 2017, is a 5% fee on BWL customers in the City, supposedly for the purpose of maintaining the utility right-of-ways that BWL uses to provide electricity to the residents it serves in East Lansing. 

The lawsuit, brought by attorney and East Lansing resident James Heos, who repped a class of East Lansing BWL customers, posited that the 5% franchise fee tacked on to the bills of BWL customers in East Lansing constitutes an illegal tax. In a pair of rulings issued March 31, 2022, Judge Wanda Stokes of Ingham County’s 30th Circuit ruled in favor of Heos, noting that the franchise fee constituted an illegal tax. 

In a press release regarding their victory in court, one of Heos’ attorneys, Gregory Hanley of the Kickham Hanley firm, said that “we are hopeful that, instead of protracting the case through appeals or otherwise, the City will finally do the right thing and stop imposing and collecting these unlawful taxes and agree to return the money it has received from the ‘Franchise Fees’ to the citizens who paid them.”

In that same release, the attorneys representing Heos and the East Lansing BWL customers estimated that the “ruling will require the City to refund at least $6.6 million in ‘Franchise Fees’ collected since July 1, 2017.” They added that if the City does not pay back this money, the amount ultimately required to be refunded will continue to grow by $1.4 million annually. 

The plaintiffs (Heos and East Lansing BWL customers who did not opt out of the class action suit) will also seek an order that money collected under the franchise fee after Stokes’ ruling be put into escrow until the case is finally concluded, according to Andrew Abood of the Abood Law Firm, another attorney representing Heos.

Several key points led to Stokes’ ruling that in the City of East Lansing, the franchise fee did constitute an illegal tax.

One is that the fee is imposed on the citizens and not BWL. Per the fee agreement, BWL effectively acts as a collection agency for the money, which it then remits to the City. 

In addition to this, Stokes found that the fee is not a “user fee” due to a number of reasons. For one, the franchise fee appears to be revenue-generating, in that the City of East Lansing adds the $1.4 million to the general fund. While the City argued that the money was then taken out of the general fund to pay for the use of right-of-ways, Stokes rejected such claims.

“However, when asked to balance the regulatory-purpose with the revenue-raising purpose, the allocation of the fee into the general fund clearly provides that it serves a revenue-raising purpose,” Stokes wrote.

Reinforcing that point is the fact that the franchise fee is not charged for some clearly-defined compensatory benefit that only franchise fee payers receive, as Stokes noted that “since the fee is part of the general fund, it would benefit any financial expense of the city.” 

The fee also failed a proportionality test due to this lack of “particularized benefit” for those paying and due to the City of East Lansing settling on the 5% rate since other local municipalities were doing the same. (It’s worth noting several similar franchise fees around the state have been struck down in lawsuits like Heos vs. East Lansing.)

Lastly, the fees are effectively compulsory — residents of East Lansing get power from BWL or Consumers Energy based entirely on where they live and don’t have the option to change to a different provider. When arguing before Stokes in 2021, lawyers for the City posited that the fee was not compulsory because residents didn’t technically have to be hooked up to the electrical grid. 

“Here, the Franchise fee is not at all tied to the amount of electricity used by the fee payers, and the fee payers choices are between either paying the franchise fee and not having electricity. The cold temperature in Michigan winters forecloses the option of living without electricity; and thus submitting to the franchise fee is effectively compulsory,” Stokes wrote in a ruling.

Depending on the new legal strategy Council approved on Tuesday, there may be more rulings to come on the issue. But for the time being, Stokes’ rulings remain in place.