Franchise utilities in California are private companies that hold a contract, called a franchise, with a city or county allowing them to install and operate infrastructure on public streets and rights-of-way to deliver electricity, natural gas, water, or telecommunications service. The franchise is the legal bridge between a private business and the public property it needs to run wires, lay pipe, or string cable. It sets what the company owes the public in return: fees, service standards, safety obligations, and the terms under which the local government can end the relationship. The framework sits on top of the California Constitution, the Public Utilities Code, decisions of the California Public Utilities Commission (CPUC), and federal rules that govern wholesale energy and pipeline safety.
Who Grants a Franchise and Under What Authority
The California Constitution gives municipal corporations the power to establish, purchase, and operate public works for services like electricity, water, and communications. It also permits private companies to build and operate those same services under conditions the city prescribes. That constitutional grant is what lets a city choose between running its own utility and bringing in a private company through a franchise.
The mechanics come from the Franchise Act of 1937, codified at Public Utilities Code Sections 6201 through 6302. It authorizes the legislative body of any municipality to grant a franchise to any person, firm, or corporation to construct and use poles, wires, conduits, pipes, and related equipment for transmitting electricity, gas, oil, or water along public streets and rights-of-way.1Justia. California Code Public Utilities Code 6201-6205.1 – Franchise Act of 1937 The utility files a formal application; the city or county negotiates duration, compensation, and operating requirements; most jurisdictions hold public hearings before granting the franchise. Local governments have broad discretion on terms so long as the agreement complies with state law.
The CPUC does not issue franchises. It does regulate how investor-owned utilities operate once they hold one. Separately, a utility planning new lines, plants, or systems generally needs a certificate of public convenience and necessity from the CPUC before construction begins, though routine extensions into already-served territory are exempt.2California Legislative Information. California Public Utilities Code 1001 That certificate requirement runs parallel to the franchise itself.
What a Franchise Agreement Contains
Service Obligations
Every franchise utility must provide continuous, reliable service in its territory. Public Utilities Code Section 451 requires that every public utility furnish and maintain “adequate, efficient, just and reasonable service, instrumentalities, equipment and facilities” necessary for the safety, health, comfort, and convenience of its customers and the public.3California Public Utilities Commission. CPUC Decision D.01-01-046 – Obligation to Serve Franchise contracts typically add on to that statutory floor: outage response benchmarks, maintenance schedules, undergrounding requirements in specified areas. Missing those obligations can trigger fines or, at the outer edge, revocation of the franchise.
Utilities also must comply with the California Environmental Quality Act when expanding or modifying infrastructure. CEQA requires environmental review before the CPUC can issue permits for new electrical, gas, or water construction.4California Public Utilities Commission. California Environmental Quality Act Applications that are not CEQA-exempt must include a Proponent’s Environmental Assessment covering the project’s potential effects.5Legal Information Institute. California Code of Regulations Title 20 Section 2.4 – CEQA Compliance
Term Length
Franchise agreements typically run between 20 and 50 years. Longer terms give the utility the certainty it needs to justify large capital investments; shorter terms let the local government come back to the table more often as technology and regulations change. Some contracts build in periodic reporting even mid-term, requiring the utility to file information on operations, finances, and regulatory compliance.
Termination, Buyout, and Relocation
Termination clauses cover failure to meet service obligations, nonpayment of franchise fees, and regulatory violations. The process generally requires formal notice and a cure period so the utility can fix the problem, and many municipalities hold a public hearing before terminating.
Some agreements include buyout provisions letting the local government purchase the utility’s infrastructure if the franchise ends, which reduces the risk of service interruption and ownership disputes. Franchise holders are also required to relocate their infrastructure at their own expense when a municipality makes lawful changes to public streets, including grade changes, road widening, or viaduct construction.6California Public Utilities Commission. CPUC Decision D0107010 – Section: 6.1 Franchise Rights That duty flows straight from the Franchise Act and keeps utilities from blocking public improvements.
Franchise Fees and Customer Rates
A franchise creates two separate money flows, and they are governed by different rules. Franchise fees are what the utility pays the local government for the privilege of using public property. Customer rates are what ratepayers pay the utility for service.
How Franchise Fees Are Calculated
The formula depends on what the utility carries. For gas and water pipelines, Public Utilities Code Section 6231.5 bases the fee on the length and diameter of pipe within the franchise area. Base rates start at $0.088 per lineal foot for pipe up to four inches in diameter and scale upward from there, adjusted annually by the Consumer Price Index.7California Legislative Information. California Public Utilities Code 6231.5 Nonpublic utility pipelines carrying industrial gas or oil can instead pay a negotiated percentage of gross annual receipts.
Video and cable providers operating under the Digital Infrastructure and Video Competition Act pay a state franchise fee of 5% of gross revenues, or the percentage the local government applied to the previous incumbent cable operator, whichever is less.8Justia. Division 2.5. The Digital Infrastructure and Video Competition Act of 2006 For electric utilities, franchise fees are typically negotiated, often as a percentage of gross receipts within the jurisdiction. The Franchise Act itself notes that its gross-receipts provisions do not dictate what chartered cities should charge, leaving those cities significant room to set their own compensation terms.1Justia. California Code Public Utilities Code 6201-6205.1 – Franchise Act of 1937
Who Sets Customer Rates
Customer rates for investor-owned utilities like Pacific Gas & Electric and Southern California Edison are regulated by the CPUC. Before those utilities can raise rates, they must file an application justifying the increase based on infrastructure costs, operating expenses, and compliance obligations. The CPUC holds public hearings and reviews each proposal in detail. Municipal utilities are not CPUC-regulated but typically go through a similar review before their local boards or city councils. Some franchise agreements allow utilities to recover the cost of infrastructure upgrades through customer bills, subject to regulatory approval, and costs tied to programs like cap-and-trade can flow through to customers as well.
Where Federal Rules End and State Rules Begin
Franchise utilities sit inside overlapping federal and state jurisdiction, and the line matters. The Federal Power Act gives the Federal Energy Regulatory Commission (FERC) authority over wholesale electricity sales and interstate transmission. Under 16 U.S.C. § 824, FERC has jurisdiction over “the transmission of electric energy in interstate commerce and the sale of electric energy at wholesale in interstate commerce” but explicitly does not have jurisdiction over “facilities used in local distribution or only for the transmission of electric energy in intrastate commerce.”9Office of the Law Revision Counsel. 16 U.S. Code 824 – Declaration of Policy; Application of Subchapter
In practice, FERC oversees the markets where power suppliers sell electricity to utilities, while the CPUC oversees the retail transactions between utilities and California customers.10Federal Energy Regulatory Commission. An Introductory Guide to Electricity Markets Regulated by the Federal Energy Regulatory Commission Everything involving local distribution, customer rates, and service quality falls under CPUC and local government authority. For natural gas pipelines, the Pipeline and Hazardous Materials Safety Administration sets federal safety standards covering design, construction, operation, and maintenance under Title 49 CFR Parts 190–199.11Pipeline and Hazardous Materials Safety Administration. PHMSA Regulations California utilities must meet those federal standards and any additional state requirements imposed by the CPUC.
Compliance Obligations That Shape Operations
Regulatory compliance is where the franchise moves from paper to practice. The CPUC enforces safety and operational standards for investor-owned utilities. Municipal utilities answer to their local governing boards. Federal agencies add layers for worker safety and pipeline integrity.
Wildfire Mitigation and Liability
Wildfire prevention has become the defining compliance issue for California electric utilities. The Office of Energy Infrastructure Safety now requires electrical corporations to submit annual Wildfire Mitigation Plans describing how they are constructing, maintaining, and operating electrical lines to minimize catastrophic wildfire risk. Energy Safety reviews and approves those plans and evaluates whether each utility’s risk-reduction efforts are sufficient.12Office of Energy Infrastructure Safety. Wildfire Mitigation Plans
California’s inverse condemnation doctrine raises the stakes. Under this rule, utilities face strict liability for wildfire damages caused by their equipment regardless of whether they acted prudently. If a broken tree branch blows into a power line and starts a fire, the utility can be liable for the resulting damage even if it met every safety requirement and properly maintained the line. The doctrine applies to both investor-owned and publicly owned utilities. The CPUC’s General Order 95 sets timelines for correcting safety hazards on overhead electric facilities, with Level 1 hazards posing immediate risk requiring immediate action.
Public Safety Power Shutoffs
Since 2012, the CPUC has authorized investor-owned electric utilities to proactively de-energize power lines as a last resort when strong winds, extreme heat, and dry conditions create significant wildfire risk.13California Public Utilities Commission. Public Safety Power Shutoffs (PSPS) These shutoffs affect PG&E, Southern California Edison, San Diego Gas & Electric, and several smaller utilities. CPUC guidelines have been issued in three phases, progressively tightening requirements for customer notification, coordination with local governments and emergency responders, community resource centers during outages, and post-event reporting. Utilities must file a report within 10 days after each shutoff event. In September 2023, the CPUC established a citation program giving staff the authority to swiftly cite utilities that fail to comply with PSPS guidelines.
SB 901, passed in 2018, requires all California electric utilities to include de-energization protocols in their wildfire mitigation plans, addressing impacts on public safety, first responders, and critical health and communication infrastructure.14California Public Utilities Commission. CPUC PSPS Rulemaking Document The law also raised the maximum penalty for utility safety violations to $100,000 per offense.
Water and Worker Safety
Water utilities under franchise agreements must comply with State Water Resources Control Board mandates on water quality and conservation, and noncompliance can bring enforcement actions and operational restrictions. Workers performing electric power generation, transmission, and distribution work must follow OSHA standards covering the primary industry hazards: electrocution, falls, confined spaces, fires and explosions, and environmental stress.15Occupational Safety and Health Administration. Electric Power Generation, Transmission, and Distribution Industry – Overview
Transfer, Renewal, and Municipalization
Franchise agreements do not automatically transfer when a utility changes ownership. Any transfer requires approval from the local government that granted the franchise, and most agreements require the new entity to demonstrate financial stability and operational capability. Mergers and acquisitions may also need separate CPUC approval to assess consumer and service impacts.
Renewal negotiations often look different from the original deal. Municipalities use renewal to update terms to current priorities, sometimes pushing for stricter service standards, higher fees, or commitments on undergrounding and renewable energy. The process frequently includes public hearings, environmental review for proposed expansions, and occasionally competitive bidding.
If a municipality decides not to renew, it can explore transitioning to a publicly owned utility. The California Constitution authorizes municipal corporations to establish, purchase, and operate public works for electricity, water, power, and other services. Municipalization is rarely simple. It typically involves eminent domain proceedings to acquire the private utility’s infrastructure, and disputes over asset valuation can run for years. The existing franchise agreement may address valuation, but those provisions do not always prevent litigation.
Recent Laws Reshaping the Deal
Several laws over the past several years have changed what franchise utilities have to do and what happens when things go wrong.
Assembly Bill 1054 created the California Wildfire Fund with approximately $21 billion in claim-paying capacity, capitalized through contributions from participating investor-owned utilities and surcharges on their ratepayers. The fund reimburses eligible claims arising from utility-caused wildfires.16California Wildfire Fund. About the California Wildfire Fund Utilities that obtain a valid safety certification from the Office of Energy Infrastructure Safety receive a presumption that their conduct was reasonable when seeking to recover wildfire-related costs, which shifts the burden to challengers to create “serious doubt” about the utility’s actions.17California Legislative Information. California AB-1054 – Public Utilities: Wildfires and Employee Protection
SB 901 established a framework for evaluating whether an electric utility can recover costs from a catastrophic wildfire. The CPUC must weigh factors including whether the utility disregarded wildfire risk indicators, failed to design or maintain its assets reasonably, and whether extreme climate conditions contributed to the fire.18California Legislative Information. Senate Bill 901 The law also prohibits utilities from recovering executive compensation from ratepayers; those costs must be funded solely by shareholders.
SB 100 set California’s goal of 100% clean energy for retail electricity sales by 2045.19California Energy Commission. SB 100 Joint Agency Report That mandate is already influencing franchise negotiations as municipalities press utilities for renewable investment and grid modernization commitments. Assembly Bill 1665 expanded the California Advanced Services Fund to encourage broadband deployment in underserved areas, with a goal of providing broadband access to at least 98% of households in each region.20California Legislative Information. California Public Utilities Code 281 – California Advanced Services Fund For municipalities negotiating telecommunications franchises, those broadband targets add another set of obligations to weigh.