November 20, 1975 53s Bw Zd 671 Ct. Civ. *gpuli 

111 Paso, 1976 

The Honorable Ron Glower, Chairman 

Senate Subcommittee on Consumer Affairs 

550 SW 2d 262,266 (TQx. 1976) ! 

Texas Supreme court 

Opinion No. H- 741 

Re: Whether a municipality 

may grant automatic 

rate adjustments to a 

public utility. 

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 

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 of any 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 

in which it shall be rendered, and from time to 

time alter or change such rules, regulations and 

compensation; . . . 

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Texas State Senate 

Austin, Texas 78711 

Dear Senator Glower: 

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p. 3150 
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 deprivation 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. 

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A reserved power of regulation is implied in every franchise notwithstanding 

the specific terms of the agreement. Dallas Railway Co. V. Geller. 271 

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 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 

of purchased gas, cost of fuel, and cost of service. See Foy. Cost Adjustment 

in Utility Rate Schedules, 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. 

p. 3151 
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 in Utility Rate Schedules, 

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 marketplace. 

Very truly yours, 

v Attorney General of Texas 

APPROVED: 

DAVID M. KENDALL, First Assistant 

&#&&ggz&; 

C. ROBERT HEATH, Chairman 

Opinion Committee 

p. 3152