November 

### 20,1975 53sBw Zd 671 Ct. Civ. *gpuli 

### 111Paso, 

### 1976 The Honorable Ron Glower, Chairman Senate Subcommittee on Consumer Affairs 

### 550 SW2d 262,266 (TQx. 1976) ! Texas Supreme court Opinion No. H- 741 Re: Whether amunicipality may grant automatic rate adjustments to a public utility. You have requested our opinion regarding the authority ofa municipality to grant automatic rate adjustments to apublic utility. The authority to regulate public utilities in Texas is delegated by the Legislature to general law cities pursuant toarticle 1119, V. T,C.S., which provides in part:

The governing body ofall incorporated cities and towns inthis State incorporated under the General Laws thereof shall have the power to regulate, by ordinance, the rates and compensation to be charged by all persons, companies, or corporations using the streets and public 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, fares or rates ofany person, firm or corporation enjoying or that may enjoy the franchise or exercising any other public privilege in said city and to prescribe the kind of service to be furnished by such person, firm or corporation, and the manner inwhich it shall be rendered, and from time to time alter or change such rules, regulations and compensation; . . . **1 I**  **i !**  **! I**  **!**

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**!** Texas State Senate Austin, Texas 78711

Dear Senator Glower:

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p. 3150The Honorable Ron Glower, Page Two ‘H-741)

You ask whether amunicipality’s grant 

### ofautomatic rate ?djustmenta to apublic utility contravenes the Supreme Court’s Texas Power &Light Co. V. City ofGarland 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 ofa franchise to autility operated as anunconstitutional deprivation ofthe property rights vested by the origihal grant) is not relevant to the present inquiry. Butthe authorities cite& in Garland bear onthe question of amunicipality’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 ofincome and revenue from the Galveston Wharves, the setting of rates and the determination ofpolicies, 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 ofthe agreement. Dallas Railway Co. V. Geller. 271 S.W, 1~106(Tex. Sup. 1925). An automatic rate adjustment is a device bywhich the municipality allows apublic utility to increase or decrease utility rates automatically without a formal hearing so long as the increase or decrease corresponds in a designated manner with an identified operating expense. Automatic rate adjustments, 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 ofpurchased gas, cost offuel, and cost of service. See Foy. Cost Adjustment in Utility Rate Schedules, 13Vand. L. Rev. 663 (1960). You have presented no specific examples of contracts, butwe assume the fuel adjustment clauses inwhich you are intereeted conform to this definition and are based on costs which are controlled bythe impersonal forces of the marketplace rather than by the discretion ofthe utility.

p. 3151The Honorable Ron Clower,Page Three (H-741)

Inour opinion a city’s enactment ofa rate ordinance which includes an automatic adjustment clause based onascertainable costs controlled by the impersonal forces ofthe marketplace may be a lawful exercise ofthe municipality’s rate regulation power. Such an ordinance establishes a rate schedule which changes in response to fluctuations in operating costs. Itsets current rates and provides an objective formula for computing future rates. See City ofNorfolk v. Virginia Electric &Power Co., 90 S.E.2d 140 (Vz955); City of Chicago v. Illinois Commerce Commission, 150N.E. 2d 776 (Ill. 1952); Foy, Cost Adjustment in Utility Rate Schedules, 13Vand. 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 toan adequate objective formula if it is based upon re’adily ascertainable costs controlled bythe impersonal forc,es ofthe marketplace. Very truly yours,



# v Attorney General of Texas APPROVED:

DAVID M. KENDALL, First Assistant 

# &#&&ggz&;

C. ROBERT HEATH, Chairman Opinion Committee

p. 3152