Southwest Gas Franchise Agreement, Audit No. 1909

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In March 2012, Scottsdale voters approved a utility franchise agreement with Southwest Gas Corporation. The agreement allows the utility to construct, maintain and operate its natural gas system in the City-owned public rights-of-way. In exchange, the agreement requires Southwest Gas to pay the City a 2% franchise fee and a 0.5% Capital Expenditures Fund Fee based on gross revenues derived from its sales and/or delivery of natural and artificial gas within the City. 

The audit found that Southwest Gas did not include about $75,000 in ancillary-type revenues as gross revenues when determining its franchise fees due. These are revenues such as fees for service changes, late payments, and maintenance. Although the franchisee does not believe that these revenue types fall under the gross revenues definition, the contract language seems to broadly encompass all gross revenues resulting from the sale or delivery of natural gas within the City. As well, certain customer accounts were not charged franchise fees and Southwest Gas representatives could not identify the specific reasons why these were excluded. In total, these ancillary and other excluded revenues amounted to about $90,000 in unpaid franchise fees and an estimated $56,000 in accumulated late payment and interest charges since the inception of the franchise agreement.  

A sample of three zip codes that encompass multiple jurisdictions was selected  to evaluate how accurately the franchisee is coding its accounts as being in Scottsdale. In these selected zip codes, about 3% of the service addresses that mapped within Scottsdale were not coded as Scottsdale, and about 5% of service addresses mapped outside of Scottsdale were coded as Scottsdale. 

Additionally, Capital Expenditures Fund fee reimbursements to Southwest Gas were adequately supported. These fee reimbursements reduced the combined Arizona region’s rate base expenses as required by the agreement, though our analysis found the direct benefits to jurisdictions vary.



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