                                     November     20, 1975           53s Bw Zd 671 Ct. Civ. *gpuli
                                                                     111 Paso, 1976
                                                                     550 SW 2d 262,266 (TQx.  1976)        !
     The Honorable  Ron Glower, Chairman
                                                                     Texas   Supreme      court
     Senate Subcommittee on Consumer  Affairs                                                              1
                                                                                                           I
     Texas State Senate                                        Opinion No.     H- 741
     Austin, Texas 78711                                                                                   i
                                                               Re:      Whether a municipality
                                                                                                               !
                                                                        may grant automatic
                                                                        rate adjustments to a              !
     Dear Senator   Glower:                                             public utility.                        I

                                                                                                               !
         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                                             i
            General   Laws thereof shall have the power to                                                 ,
            regulate,  by ordinance,    the rates and compen-                                              I
            sation to be charged by all persons,      companies,
                                                                                                               1
            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,                                          I
             fares or rates of any person,    firm or corporation                                          /
                                                                                                           I
             enjoying or that may enjoy the franchise      or exer-
                                                                                                           /
             cising 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                                         1
             in which it shall be rendered,    and from time to
                                                                                                           !
             time alter or change such rules,      regulations  and
             compensation;    . . .                                                                        I
                                                                                                           3
                                         p.   3150

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                                                                                                           ,




                                                                                                           !
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  depriva-
tion 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.

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 desig-
nated manner with an identified operating expense.          Automatic    rate adjust-
ments,    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 market-
        place.

                                              Very   truly yours,




                                     v        Attorney    General   of Texas

APPROVED:




DAVID   M.   KENDALL,     First   Assistant




&#&&ggz&;
C. ROBERT HEATH,        Chairman
Opinion Committee




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