East Lansing Loses BWL Franchise Fee Lawsuit
The Michigan Supreme Court has ruled against East Lansing in a lawsuit brought over a franchise fee the city benefited from that was placed upon Lansing Board of Water and Light (BWL) customers in the city.
The ruling will return money collected by the city to East Lansing BWL customers, but will cause financial stress for the city.
According to the Michigan Supreme Court opinion, the idea for a franchise fee came in 2016 when the city was in the thick of its struggles with its pension debt. Then City Manager George Lahanas proposed that BWL charge a franchise fee to customers, revenue that would be collected by the city and added to its general fund. In 2017, City Council approved a 5% franchise fee agreement with BWL unanimously.
The city has been collecting about $1.4 million in revenue annually from the franchise fee. In 2020, attorney and East Lansing resident James Heos filed a class action lawsuit, claiming the city implemented a tax on its residents, without the required vote from the public. Yesterday, Monday, Feb. 3, the Michigan Supreme Court announced its agreement with that stance in a 4-1 decision.
The court ruled the city collected a “disguised tax” by charging it through BWL. The ruling said the fee was not voluntary because BWL services almost 90% of the city without an alternate utility provider, and electricity is a necessity.
Consumers Energy, which serves the remainder of the city, refused to collect the franchise fee on behalf of the city, the opinion says.
The city initially claimed the fee was not a tax, but used towards maintaining the right-of-ways that BWL uses to provide electricity. However, the money collected from the franchise fee went to the city’s general fund, which the city can allocate as it pleases.
All five Michigan Supreme Court justices agreed the charge was a tax. The dissenting vote, from Justice Richard Bernstein, was due to his belief that the “taxpayer” in the case was actually BWL, and the lawsuit came after the statute of limitations had expired.
Before City Council enacted the franchise fee in 2017, there were warning signs that the fee was illegal.
In 2016, BWL staff expressed concern over the franchise fee being added. In a November 2016 BWL Board of Commissioners meeting, BWL General Manager Richard Peffley stated his concern the fee could be illegal, the opinion states.
In the agreement between BWL and the city that included the franchise fee, there is language stating that the city “shall indemnify, hold harmless and defend” BWL from liability, the opinion states.
The ruling brings an end to a legal battle that has been raging for nearly five years. In 2021, thousands of East Lansing residents were notified they will be included in the class action suit, unless they opt out. In 2022, a judge initially ruled in favor of Heos. However, an appeals court overturned that ruling the following year, a ruling Heos appealed. The case was then sent to the state Supreme Court.
Following the initial ruling in favor of Heos in April 2022, one of his attorneys issued a press release stating that the “ruling will require the City to refund at least $6.6 million in ‘Franchise Fees’ collected since July 1, 2017” and that the amount will continue to grow by $1.4 million annually if the money is not paid back, ELi reported at the time.
As that ruling was made nearly three years ago, the amount owed by the city has presumably grown.
ELi reached out to the city via its media portal requesting an interview about what the financial impact on the city will be and how payments will be made. Communications Director Carrie Sampson said city officials are reviewing the recently received opinion, and will reach back out when they have more information.
We will continue to report on the fallout of the ruling when more information is known.