Communities have previously been allowed to charge fees to cover the costs of operating, maintaining and regulating a utility.
The question dates to 2004, when attorney Brad Schroeder filed a lawsuit on behalf of Lisa Kragnes, a single mother and Des Moines resident who questioned why the franchise fee was on her bill. Polk County District Court Judge Michael Huppert ruled in 2006 that the fee was an illegal tax and that city couldn't collect from Kragnes, but the city appealed and the Iowa Supreme Court returned the case back to district court.
The Supreme Court said the city could charge the fee if it can justify the costs with actual expenses.
Schroeder later sought and was granted class certification for all Des Moines residents and businesses since the fee, which appears on MidAmerican energy bills, took effect. The fee brings in about $12.6 million annually.
The city claimed the money helps cover costs required for utilities, but plaintiffs call it an illegal tax that exceeds the city's costs.
A second trial was held in November and both sides are waiting for Polk County District Court Judge Joel Novak to issue his decision.
It wasn't immediately clear what impact the judge's decision could have, but if he rules against Des Moines the city could still face paying millions of dollars in refunds to customers.
Des Moines City Attorney Bruce Bergman said that under the new law, which takes effect immediately, cities can charge up to 5 percent for a franchise fee unrelated to costs of providing the service.
"It sets up a process that is intended to create transparency for the public in regard to the enactment of franchise fees," Bergman said.
He said that before a new franchise fee is enacted or an existing fee amended, cities will be required to notify the public how the revenue that is collected will be spent.
The measure signed by Culver also identifies permissible uses for franchise fee revenues, Bergman said.
"What it does is it restricts the use to services and capital expenditures that are important to Iowans," Bergman said.
That could include disaster mitigation, streets and highways and public safety, he said.
Bergman, who helped craft the legislation, said it also allows cities to use a portion of the funds for low-income energy assistance programs and weatherization programs.
There are now 26 cities in Iowa that charge franchise fees, Bergman said. They range in size from Des Moines to smaller communities, such as Elkader and Lytton.
Schroeder said he is "pleased that there is now a legal mechanism in place to allow cities to charge this tax which the city of Des Moines has been charging illegally for many years.
"We believe the city should have secured this authority before it began charging this tax," he said.
Schroeder said the bill does not affect what has happened in the past and that he anticipates Judge Novak will order a refund to customers. He declined to say how much that could be.