Opinion ID: 1198613
Heading Depth: 1
Heading Rank: 3

Heading: Reasonableness of Late Charge

Text: The question next arises as to whether the late charge allowed by the Commission is reasonable. Complainants allege it is not and mount their attack on several fronts. They contend the present billing system is unreasonable because (1) it discriminates against low income persons; (2) it does not conform to standard commercial practices; (3) it does not encourage prompt payment; and (4) it does not reasonably assess collection costs against those who create them. A considerable portion of complainants' brief is devoted to the proposition that present billing practices discriminate against low income families, older persons, welfare recipients and persons on fixed incomes. They argue that because the utilities use cycle billing, coupled with a short payment period, these persons are consistently required to pay an excessive late charge. Complainants asked the Commission to require the utilities to allow consumers to choose the date on which they are billed and that the time for payment be extended to 45 days before a late penalty is imposed. The Commission ruled that both requests were unreasonable. We believe there was substantial competent evidence to support the ruling of the Commission on both requests. Allowing consumers to choose the date on which they were to be billed would increase operating costs. Extending the time for payment would increase the amount of borrowed capital necessary to operate and would increase delinquent accounts, collection charges and bad debts. Ultimately, these increases would reach the general public through rate increases. The Commission correctly noted that the solution to the problems did not lie within the purview of the Commission to solve by forcing the general public to shoulder larger utility bills. The Commission further found there was no proof the utilities intentionally designed their billing to discriminate against lower income consumers. On the contrary, the record indicates this class of persons is spread throughout the respective service areas with no significant concentration in one billing district over any other. Absent any proof the utilities have deigned to discriminate against the poor, this court can offer no relief. ( State Ex Rel. Guste v. Council of City of New Orleans, supra.) Mere disparity of wealth alone does not require a court to act. ( San Antonio School District v. Rodriguez, 411 U.S. 1, 36 L.Ed.2d 16, 93 S.Ct. 1278. Complainants next assert the late charge is inconsistent with standard business practices and therefore contrary to public policy. The inherent weakness with the argument is the fact respondents are not standard commercial enterprises; they are public utilities which are regulated by the state. (K.S.A. 66-101, et seq. ) The legislature has declared that utility services are affected with a public interest. Every common carrier and public utility controlled by the Commission is required to serve all members of the general public without discrimination and must establish just and reasonable rates, fares, tolls and charges. (K.S.A. 66-107.) Rates, regulations and charges must be published (K.S.A. 66-108), and must not be ignored except within strict exceptions. (K.S.A. 66-109.) Utilities cannot refuse to serve a slow-paying customer or a credit risk who might be turned away by a local merchant. In order to compensate for this factor utilities are allowed to require deposits and impose late charges to minimize the risk of bad debts. The operation of a public utility cannot be compared with an ordinary business. ( Delich v. Iowa Electric Light & P. Co., supra.) Complainants argue throughout their brief that there are ways to enhance and improve present billing and collection procedures. These were considered and rejected by the Commission. Ignoring the limited scope of review possessed by this court, complainants attempt to convince us of the viability of their proposals. Suffice it to say that the existence of another method of collection does not preclude our determination that the methods previously mentioned are nonetheless reasonable. The choice of a method of collection remains with the Commission. Our review is limited to a determination of whether a method is reasonable, not whether it is the most desirable of those possible. Having made this determination we need not consider the merits of the alternatives proposed in the complainants' brief. Complainants contend that late payment charges do not encourage prompt payment. The evidence clearly disproves this fact. Both respondents and two intervenors, KCP&L and CT&U, presented opinion evidence and statistics which demonstrated that customers facing late charges pay more promptly than those who are not faced with late charges, and the greater the late charge the more promptly they pay. In their challenge, complainants presented evidence that Southwestern Bell Telephone did not levy a late charge and still collected 92% of its bills without any collection effort after initial billing. The Commission distinguished Southwestern Bell from KG&E and Gas Service on the basis that Southwestern Bell bills in advance of service to be performed, while KG&E and Gas Service bill for past service. The distinction is valid. Finally, complainants allege the late charge is unreasonable because it does not assess collection costs against those who create such costs. Before examining the point it is necessary to review the billing procedure. When bills are prepared on the first day of the month they are due on the 15th. If a consumer does not pay by that date the 5% penalty is added. No additional action is taken by the utility company to collect the bill until later. Gas Service prepares its second notice on the 22nd. KG&E does not prepare its second notice until the 25th. The evidence is uncontroverted that until the second notice is prepared neither utility makes any effort to collect any of the outstanding accounts. Yet, during this time customers continue to pay their bills, including the 5% penalty assessed as a late charge and collection fee. KG&E collected $355,670 while it spent $463,529 on collections. Gas Service collected $444,220 while it spent $484,984 collecting late bills. There are two classes of late payers: (1) Those who pay after a penalty is imposed but before collection efforts are initiated, and (2) those who do not pay until the utility company is forced to make additional collection efforts. The practice of assessing the same penalty against the two classes is unreasonable. Forty-four percent of all persons paying late fees to KG&E did so although they did not cause the company to incur any expense other than the extension of credit for the time between the date the late penalty was imposed and the date the bill was paid. KG&E's cost of extending credit to all its late customers was only $11,333. Assuming the first class of late payers shared the same proportion of the cost of credit as their percentage of the entire group (44%), they would cause KG&E to extend $4,986.52 in credit. However, the actual proportion must be smaller, as the remaining 56% of late payers still had not paid their bills and forced the company to extend them additional credit. The number of persons comprising the first class of late payers for Gas Service is not known; therefore, similar calculations are not possible. While the first class of late payers cost KG&E $4,986.52 in credit, they paid $156,494.80 in late fees. Had all late payers paid between the 15th and 25th day, before second notices were sent, KG&E would have collected $355,670 in penalties and spent nothing for collection. This further illustrates the irrational application of the present late penalty system. The touchstone of public utility law is the rule that one class of consumers shall not be burdened with costs created by another class. ( Coffelt v. Ark. Power & Light Co., 248 Ark. 313, 451 S.W.2d 881 [1970]; Utilities Comm. v. Consumers Council, 18 N.C. App. 717, 198 S.E.2d 98 [1973].) The Commission recognized this rule and we are in full accord. The problem is whether this theory is carried out by charging a uniform penalty or charge to all delinquent customers. The evidence demonstrates that many delinquent customers pay their bills before any collection costs accrue. Under the present system they must pay the same as the more recalcitrant customer pays. The argument advanced by the utility companies, the theory of which we approve, is that a prompt paying customer should not be burdened with the expense caused by someone else; but when fairness to the first class of late payers is considered we find they are required to do the very thing the penalty is intended to prevent, and are required to contribute toward the cost of collecting the bills owed by the more delinquent customers. To this extent we think the practice of assessing the same penalty against all delinquent customers, regardless of the nature or character of their delinquency, is discriminatory and unfair. ( Ford v. Waterworks Co., 102 Miss. 717, 59 So. 880 [1912]; Pub. Serv. Com. of Mo. v. Kansas City Power & Light Co., 2 P.U.R. [N.S.] 391 [1933].) Our decision does not condemn the use of a late penalty. There is ample justification for imposing a late payment charge. ( City of Columbus v. Gas Co., 96 Kan. 367, 149 Pac. 402; Southwestern Tel. Co. v. Danaher, 238 U.S. 482, 490, 59 L.Ed. 1419, 35 S.Ct. 886.) The charge which is levied, however, must be reasonably related to the purpose to be achieved; and if the purpose is to recover collection costs the utility company must collect from the class of consumers creating the costs. The penalty charged the late payer who causes the utility company to incur collection costs should reflect those costs and should be more than the penalty charged the late payer who does not cause collection costs. The penalty against the first class of late payers should be less than the penalty against the late payer who causes collection costs and should be limited to an amount which encourages prompt payment and covers the cost of extending credit. We conclude the action of the Commission relating to utility billing and late payment charges is not unreasonable except as to the imposition of a uniform late penalty. That portion of the judgment of the district court which affirmed the Commission's decision on the reasonableness of the late charge is reversed and the case is remanded with directions to return the matter to the Commission for further proceedings consistent with the opinion. The decision of the district court is affirmed in part and reversed in part and remanded with directions. SCHROEDER, J., not participating. FROMME, J., dissenting. Any classification of customers made for the purpose of fixing late payment charges is bound to be arbitrary in nature. Some discrimination will necessarily result in fixing the classes. Late payment charges have the effect of decreasing late payments and bad debts. Those are the primary purposes for allowing such charges to be made. Such charges appear to be a means of accomplishing a legitimate purpose in the rate making process. A late payment charge requires that some arbitrary time limit be set for paying bills. This of necessity fixes two arbitrary classes of customers  those who pay on time and those who don't. The majority on this court seem to agree that a five percent (5%) late charge on customers who fail to pay their bills within some arbitrary time limit after billing is reasonable. However, the majority hold that such a charge is unduly discriminatory, unless an additional class of late-late paying customers be recognized. At this point I disagree with the majority and will briefly set forth my reasons. To require the state Corporation Commission to further divide late paying customers into additional classes so as to burden the late-late paying customers with some additional expense incurred in securing payment of their bills is both economically burdensome and practicably unworkable. Where are the lines of classification to be drawn? Should the additional classification be set on a basis of payment after additional days, weeks or months from the first billing? If so, how do you arrive at a flat charge for these late-late paying customers which will reflect the actual costs incurred for postage, bookkeeping, billing, personal collection efforts, costs of turning off meters and of restoring service up to the time a bill is finally paid? What I am saying is that any further classification of late-late paying customers must likewise be made on an arbitrary basis and not on the basis of the actual expenses incurred. Some discrimination will result regardless of where the lines are drawn. Some economically feasible balance must be struck between expenses incurred and classifications to be charged. The rule that one class of consumers shall not be burdened with costs created by another class as set out in paragraph 10 of the syllabus was designed for classifications of customers based upon the different classes of utility service received. See Central Kansas Power Co. v. State Corporation Commission, 221 Kan. 505, 561 P.2d 779. It was not designed to apply to subclassifications of customers used in determining proper variances in late payment charges. In the present case all customers are residential customers in and around Wichita and the costs of generating and transmitting their electrical energy are the same. Relatively, the amount of late payment charges collected is minor in comparison to the costs of generating and transmitting energy. The amount of the late payment charges of one of the two complainants in the present case, when figured over a 24-month period, amounts to an average of 38 cents per month. She made only 14 payments to the utility during this 24-month period. K.S.A. 66-107 requires that utility charges be just and reasonable and that classifications used to fix such charges not be unduly preferential or unreasonably discriminatory. I consider the late charge of 5% in this case reasonable and I do not consider the classifications, those who pay on time and those who do not, unduly discriminatory. The power and scope of judicial review provided in K.S.A. 66-118d does not give the courts authority to substitute their judgment for that of the commission. It is only when the commission's determination is so wide of the mark as to be outside the realm of fair debate that a court may nullify it. ( Central Kansas Power Co. v. State Corporation Commission, supra, Syl. 2.) The matter falls within the realm of fair debate and I would affirm the district court's judgment which approved the order of the commission. KAUL J., joins in the foregoing dissenting opinion.