Washington Supreme Court Upholds King County Ordinance Requiring Utility Providers to Pay for Access to County’s Right-of-Way and Signals Approval for Other Counties to Follow Suit

On December 5, 2019, the Washington State Supreme Court released its opinion in King County v. King County Water Districts, et al.,[1] upholding King County’s Ordinance 18403, which requires utility companies who are franchise grantees to pay “franchise compensation” for their use of the County rights-of-way.  Generally, utility companies must apply for and obtain from the County a franchise permitting it to do necessary work in the County rights-of-way. [2]  Previously, King County only charged an administrative fee associated with issuing such a franchise.  But with the new franchise compensation charges, King County estimates that it will raise approximately $10 million dollars per year for its general fund.

Ordinance 18403 passed in November 2016 and was the first of its kind in the state.  The ordinance created a rule, set forth in RCW 6.27.080, requiring electric, gas, water, and sewer utilities who are granted a franchise by King County to pay “franchise compensation” in exchange for the right to use the County’s rights-of-way.  The rule provides that franchise compensation is in the nature of an annual rent payment to the County for using the County roads.  King County decides an initial estimate of the charge by considering various factors such as the value of the land used, the size of the area that will be used, and the density of the households served.  But utility companies can negotiate with the County over the final amount of franchise compensation.

After King County passed Ordinance 18403, certain water-sewer districts and private utilities signaled they would bring a legal challenge.  King County preemptively sought a declaratory judgment validating Ordinance 18403 and the franchise compensation charges.  The superior court ruled against King County, holding that King County did not have the authority to charge franchise compensation.

However, on direct review, the Supreme Court reversed and upheld the ordinance and the franchise compensation charges.  In its opinion, the Supreme Court addressed several different legal challenges:  (1) whether franchise compensation was an unauthorized tax, (2) whether King County violated state law by requiring franchise compensation, and (3) whether certain utilities may avoid paying franchise compensation by using the rights-of-way without a franchise.

First, the Court held that the franchise compensation charge is not a tax.  The Court noted that although the County will raise revenue for the general fund from the charges, that alone does not render the charge a tax because the utility companies acquire the right to use the County’s property in exchange for the charge, which they can negotiate.  The Court viewed the franchise charge as akin to a rent payment rather than a tax.

Second, the Court ruled that the franchise compensation charge does not conflict with state law.  Looking to caselaw, the Court stated that “counties may require compensation for the use of public streets as a condition for granting a franchise, unless forbidden by statute or contrary to public policy.”  Further, the Court noted that King County is a “home rule” County that has broad authority to legislate local affairs as it sees fit, as long as it does not conflict with state and constitutional law.  The Court did not find any prohibition against the franchise charge, and thus concluded that it does not violate state law.

Finally, the Court rejected the water-sewer districts’ argument that they—as special purpose local governments—had statutory authority to use the County rights-of-way without obtaining a franchise (and thus without having to pay franchise compensation).  Utility companies must obtain a franchise to use County rights-of-way, unless they are expressly exempt from doing so or have a separate source of authority permitting the use of the rights-of-way.  The Court reviewed and interpreted the districts’ authorizing statutes and concluded that the statutes did not grant the districts independent authority to use the County rights-of-way without a franchise agreement with the County.  Accordingly, the Court held that the water-sewer districts must pay franchise compensation to use the rights-of-way.

Comment:  With this decision, the Court has effectively given the green light for other Washington counties to implement similar ordinances as a way to generate additional revenue.  Although the Court repeatedly stressed in its opinion that the County cannot compel utility providers to agree to the franchise compensation, the reality is that if utility providers do not pay franchise compensation, they cannot use the rights-of-way that are critical to their infrastructure.  So, while the amount of franchise compensation is negotiable, the County has a significant upper hand in the negotiation.  King County estimates that it will make approximately $10 million per year from franchise compensation charges.  Time will tell how utility providers will bear that cost, but other Washington counties will certainly be attracted to this new revenue-generating scheme.

Future litigation over individual franchise compensation assessments are also likely.  In its opinion, the Court noted that its determination that franchise compensation is not a tax does not foreclose future “as-applied” challenges by utility companies who feel they have been assessed excessive amounts in franchise charges.  Additionally, the comments by the Court that the franchise compensation is in the nature of a rent payment could have interesting implications for characterizing the legal relationship between the County and utility providers.  Washington courts have already determined that in certain circumstances utility providers are agents “acting for” the County.  Now there are also elements of a landlord/ tenant relationship between them by virtue of franchise compensation.  

[1] 2019 WL 6605260

[2] Ordinance 18403 only applies to franchise holders.  Some utility providers are expressly permitted by statute to use rights-of-way without a franchise.  See, e.g., RCW 35.58.330 (giving metropolitan municipal corporations the right to use public rights-of-way without a franchise).

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