                      The Attorney                General of Texas
                                          December     18,    1978
JOHN L. HILL
Attorney General


                   Honorable Joe Wyatt, Jr.                          Opinion No. H - 12 8 9
                   Chairman
                   House Committee on Ways & Means                   Re: Whether the State of Texas
                   State Capitol                                     is subject to the provision in the
                   Austin, Texas 787ll                               City of Austin’s Electric Rate
                                                                     Ordinance which provides for a
                                                                     five percent (5%) penalty on
                                                                     electric bills paid late.

                   Dear Representative   Wyatt:

                          You have requested our opinion regarding whether the State of Texas is
                   required to pay a five percent late charge on bills for electric utility service
                   supplied by the City of Austin.

                         Part 3 of the current rate ordinance for the City of Austin, adopted by
                   the City Council on January 19, 1978, provides:

                               Bills computed under this ordinance are due when
                               rendered. Each bill shall have set forth thereon a date
                               falling between twenty-seven       and twenty-nine days
                               after the date of the bill. Bills paid after the specified
                               date shall have added thereto a penalty equal to five
                               percent (5%) of the bill.       Provided, however, this
                               provision shall become effecttve on all bills rendered
                               after April 1, 1978.

                   It has been suggested that the state is prohibited from paying any portion of
                   the referenced ‘penalty” by a number of provisions of the Texas Constitution.
                   Under this view, payment of the ‘penalty” would represent “extra compensa-
                   tion,” contrary to article 3, sections 44 and 53, a “grant . . . of public moneys”
                   in violation of article 3, section 51, or an “appropriation         for private or
                   individual purposes,” in contravention of article 16, section 6. Alternatively,
                   if the late charge is deemed a form of interest, the state would not be liable
                   for its payment absent an express contract or statute so providing.            See
                   Walker v. State, 103 S.W.2d 404, 407 (Tex. Civ. App. - Waco 1937, no writ).

                          The constitutional argument is based upon the well-established principle
                   that   the state may not expend public funds unless it receives benefit




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Honorable Joe Wyatt, Jr.    -   Page 2        (H-1289)



therefrom or unless the expenditure serves a proper public purpose. Barrington V.
Cokinos, 338 S.W.2d 133, 140 (Tex. 19601; Byrd v. City of Dallas, 6 S.W.2d 738, 740
-28).        Although no Texas court has ever determined the question, the courts
of a number of other jurisdictions have held that utility late charges constitute
“operating expenses” rather than penalty or interest.      Jones v. Kansas Gas &
Electric Co., 565 P.2d 597, 604 (Kan. 1977); State ex rel. Guste v. City of New
Orleans, 309 So.2d 290, 295 (La. 1975); State ex rel. Utilities Comm’n v. North
Carolina Consumers Council, Inc., 198 S.E.2d 98, 100 (N.C. App. 1973); see also
Delich v. Iowa Electric Light & Power Co., 9 P.U.R. (4th) 335, 339 (19751.

       Each of these decisions relies upon the court’s opinion in Coffelt v. Arkansas
Power h Light Co., 451 S.W.2d 881 (Ark. 19701. In that case, a consumer class
action suit challenged the legality of a utility late charge on the ground that it
violated the statute prohibiting usury. The court declared:

           The late charge, far from being an exaction of excessive
           interest for the loan or forebearance of money, is in fact a
           device by which consumers are automatically      classified to
           avoid discrimination.    Its effect is to require delinquent
           ratepayers to bear, as nearly as can be determined, the
           exact collection costs that result from their tardiness in
           paying their bills.

Any other result, the court said, would penalize “customers who pay their bills
promptly” by requiring them to share “the burden of collecting costs not of their
making.” 451 S.W.2d at 884.

       We believe it is significant that the United States has long recognized the
right of a utility to impose a late charge on a federal agency if the company’s
applicable  rate schedule provides for such payment.     See 51 Comp. Gen. 251, 252
(1971). The Comptroller General of the United Statexas          held that utility late
charges do not constitute penalty or interest, “since such charges merely recoup
direct costs incurred by [the? utility incident to late payments.” Comp. Gen., file
no. B-186494 (1976). See United                                                  412 F.
Supp. 165 (E.D.N.C. 19m. If in fact a late charge “merely recoups direct costs,”
the state is not constitutionally     prohibited from expending funds in payment
thereof, since the late charge represents payment for a portion of the service
provided to the state.

       In view of the virtually unanimous authority from other jurisdictions, we
believe that utility late charges represent an ordinary cost of doing business, which
may be passed on to the State of Texas as a utility consumer, so long as the
applicable rate ordinance provides for such charges, and so long as there is a
reasonable relationship between the amount of the late charge and the costs it
purports to recoup.      Absent a dispute as to the reasonableness of the amount
charged, the state ls not prohibited by the Constitution or by any statute from
paying the assessment.       Accordingly, it is our opinion that a delinquent state




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Honorable Joe Wyatt, Jr.   -   Rage 3 (H-128g)



agency is at present required to pay the five percent             late   charge   on bills   for
electric utility service supplied by the City of Austin.

                                  SUMMARY

           A five percent late charge on bills for electric utility
           service is neither interest nor penalty, but merely a cost of
           doing business assessed against a delinquent consumer, so
           long as there is a reasonable relation between the amount of
           the charge and the costs it purports to recoup. Absent a
           contrary showing, the State of Texas is not prohibited,
           either by the Texas Constitution or by any statute, from
           paying the charge, and it is required to do so if the
           applicable city rate schedule so provides.

                                            Very truly   yours,




                                   /   /’ Attorney General of Texas




Opinion Committee

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