Case Information
*1 November 20, 1975 53s Bw Zd 671 Ct. Civ. *gpuli 111 Paso, 1976 Senate Subcommittee The Honorable Ron Glower, Chairman Texas State Senate on Consumer Affairs Opinion No. H- 741 Texas Supreme court SW 2d 262,266 550 (TQx. 1976) ! I [1] Austin, Texas 78711 i Re: Whether a municipality ! may grant automatic rate adjustments to a ! public utility. Dear Senator Glower: I !
You have requested our opinion regarding the authority of a municipality
to grant automatic rate adjustments to a public utility.
The authority to regulate public utilities in Texas is delegated by the Legislature to general law cities pursuant to article 1119, V. T, C. S. , which provides in part:
The governing body of all incorporated cities and towns in this State incorporated under the i General Laws thereof shall have the power to or corporations using the streets and public sation to be charged by all persons, regulate, by ordinance, the rates and compen- companies, I , [1] grounds of said city or town, and engaged in
furnishing water, gas, telephone, light, power,
or sewerage service to the public, . . . Similar authority is’ granted to home rule cities by article 1175 (U), V. T. C. S., which permits such cities:
%. . . . To determine, fix and regulate the charges, I fares or rates of any person, firm or corporation / I
enjoying or that may enjoy the franchise or exer- / cising any other public privilege in said city and / to prescribe the kind of service to be furnished by time alter or change such rules, in which it shall be rendered, and from time to such person, firm or corporation, regulations and and the manner [1] ! compensation; . . . I I , !
The Honorable Ron Glower, Page Two ‘H-741)
You ask whether a municipality’s grant of automatic rate ?djustmenta to a public utility contravenes the Supreme Court’s Texas Power & Light Co. V. City of Garland decision, 431 S. W. 2d 511 (Tex. Sup. 1968). wMch you advise “holds that a city cannot surrender or contract away its bargaining pmer. ”
The specific issue of Garland (whether an ordinance enacted subsequent to the award of a franchise to a utility operated as an unconstitutional depriva- tion of the property rights vested by the origihal grant) is not relevant to the present inquiry. But the authorities cite& in Garland bear on the question of a municipality’s authority to permit automatic rate adjustments.
When a municipality regulates rates charged by a public utility, it is performing a governmental function not delegable by the municipality. Kousal V. Texas Power & Light Co., 179 S. W. 2d 283 (Tex. Sup. 1944). The Supreme Court has most recently reaffirmed this poeition in City of Galveston V. Hill, S. W. 2d 103 (Tex. Sup. 1975):
The management of income and revenue from
the Galveston Wharves, the setting of rates and
the determination of policies, being governmental
functions, . . . cannot be surrendered, delegated
or bartered away. Id. at 105. - A reserved power of regulation is implied in every franchise notwithstanding the specific terms of the agreement. Dallas Railway Co. V. Geller.
S. W, 1~106 (Tex. Sup. 1925).
An automatic rate adjustment is a device by which the municipality allows a public utility to increase or decrease utility rates automatically without a formal hearing so long as the increase or decrease corresponds in a desig- nated manner with an identified operating expense. Automatic rate adjust- ments, whether authorized by ordinance or by franchise, are generally grouped according to the character of the operating expense that triggers the rate change. The most common include adjustments based upon the cost of purchased gas, cost of fuel, and cost of service. See Foy. Cost Adjustment 13 Vand. L. Rev. 663 (1960). You have presented no specific examples of contracts, but we assume the fuel adjustment clauses in which you are intereeted conform to this definition and are based on costs which are controlled by the impersonal forces of the marketplace rather than by the discretion of the utility.
The Honorable Ron Clower,Page Three (H-741)
In our opinion a city’s enactment of a rate ordinance which includes an automatic adjustment clause based on ascertainable costs controlled by the impersonal forces of the marketplace may be a lawful exercise of the municipality’s rate regulation power. Such an ordinance establishes a rate schedule which changes in response to fluctuations in operating costs.
It sets current rates and provides an objective formula for computing future rates. See City of Norfolk v. Virginia Electric & Power Co., 90 S. E .2d 140 (Vz955); City of Chicago v. Illinois Commerce Commission, 150 N. E. 2d 776 (Ill. 1952); Foy, Cost Adjustment
13 Vand. L. Rev. 663 (1960).
SUMMARY A municipality does not necessarily surrender its governmental power when it grants an automatic rate adjustment to a public utility pursuant to an adequate objective formula if it is based upon re’adily ascertainable costs controlled by the impersonal forc,es of the market- place.
Very truly yours, v Attorney General of Texas APPROVED:
DAVID M. KENDALL, First Assistant
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C. ROBERT HEATH, Chairman
Opinion Committee