
237 S.E.2d 484 (1977)
34 N.C. App. 146
TOWN OF TAYLORSVILLE
v.
MODERN CLEANERS, Samuel J. Brookshire d/b/a.
No. 7622DC1015.
Court of Appeals of North Carolina.
September 21, 1977.
*485 Williams, Pannell & Lovekin by Martin C. Pannell, Newton, for plaintiff-appellee.
Richard L. Gwaltney, Taylorsville, for defendant-appellant.
HEDRICK, Judge.
Assuming arguendo that the ordinance dated 1 July 1975 increasing the rates for sewer only users was duly enacted, the question before us is whether the trial court erred in concluding that "the sewer rates of the Plaintiff when applied to the Defendant are not arbitrary, discriminatory, or an abuse of the Legislative authority of the Plaintiff ...."
A city's authority to own, operate, and finance a public utility is derived from the legislature. G.S. 160A-311, et seq. G.S. 160A-314(a) provides in pertinent part:
"A city may establish and revise from time to time schedules of rents, rates, fees, charges, and penalties for the use of or the services furnished by any public enterprise. Schedules of rents, rates, fees, charges, and penalties may vary according to classes of service ...."
*486 It is a fundamental principle that a public utility, whether publicly or privately owned, may not discriminate in the distribution of services or the establishment of rates. Dale v. City of Morganton, 270 N.C. 567, 155 S.E.2d 136 (1967); Utilities Commission v. Mead Corp., 238 N.C. 451, 78 S.E.2d 290 (1953); Griffin v. Goldsboro Water Co., 122 N.C. 206, 30 S.E. 319 (1898); 12 McQuillin, Mun. Corp. § 35.37a (3d Ed. 1970). Thus, the statutory authority of a city to fix and enforce rates for its services and to classify its customers is not a license to discriminate among customers of essentially the same character and services. Rather, the statute must be read as a codification of the general rule that a city has "the right to classify consumers under reasonable classifications based upon such factors as the cost of service ... or any other matter which presents a substantial difference as a ground of distinction." 12 McQuillin, Mun. Corp. § 35.37b, at 485-6 (3d Ed. 1970) (Emphasis added). In Utilities Commission v. Mead Corp., supra, 238 N.C. at 465, 78 S.E.2d at 300, the Supreme Court recognized this rule: "Rates may be fixed in view of dissimilarities in conditions of service, but there must be some reasonable proportion between the variance in the conditions and the variances in the charges. Classification must be based on substantial difference." (Citation omitted). See also Utilities Commission v. Teer Co., 266 N.C. 366, 376, 146 S.E.2d 511, 518 (1966).
Application of the foregoing principles to the present case compels the conclusion that the classification giving rise to higher rates for sewer only users is without justification. The plaintiff's own witness, the mayor of Taylorsville, testified that there is no difference between the costs of providing water and sewer services and sewer only services. We hold that the higher rate charged defendant for sewer only service is not supported by any "substantial difference" in the type of service rendered and bears no rational relation to the cost of service or any other relevant factor, and thus, is arbitrary and discriminatory.
Reversed.
VAUGHN and CLARK, JJ., concur.
