      TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN


                                        NO. 03-01-00723-CV




                                     Ira W. Black, Jr., Appellant

                                                   v.

                                      City of Killeen, Appellee


            FROM THE DISTRICT COURT OF BELL COUNTY, 146TH JUDICIAL DISTRICT
                 NO. 169,363-B, HONORABLE RICK MORRIS, JUDGE PRESIDING




                Appellant Ira W. Black, Jr. appeals the district court=s declaratory judgment entered in

favor of the City of Killeen. Black owns five apartment buildings built between 1986 and 2000 in the City

of Killeen, a home rule municipality. See Tex. Const. art. XI, ' 5; Tex. Loc. Gov=t Code Ann. ' 5.004

(West 1999). At issue in this appeal are tap fees assessed by the City for apartment buildings Black

constructed in 1998 and 2000.1 Prior to 1998, Black paid the City a tap fee per building connection.2 In

1998 and 2000, pursuant to a 1997 amendment to the tap fee ordinance, Black paid a per living unit



        1
           ATap fees@ are assessed by the City to cover the costs of connecting a customer to the City=s
water and sewer system.
        2
            For the apartment buildings built in 1986, 1989, and 1994, Black paid only for a water tap and
a sewer tap connection. He paid: (i) $1000 for a water tap and $35 for a sewer tap in 1986; (ii) $1000 for
a water tap and $35 for a sewer tap in 1989; and (iii) $1072 for a water tap and $200 for a sewer tap in
1994.
connection charge.3 In compliance with the amended fee schedule, but under protest, Black paid an initial

base tap charge, plus an additional $300 water tap fee and $300 sewer tap fee for each living unit in the

complexes.

                Black filed a declaratory judgment seeking a determination that the fees under the amended

ordinance were (i) unreasonable, (ii) invalid impact fees, and (iii) discriminatory. The City filed a

counterclaim, seeking a declaration that the water and sewer tap fees were valid, enforceable, and not

impact fees. At trial, Black called a rate expert, Bruce Fairchild, who testified in support of Black=s

position. Black also called Killeen City Manager, David Blackburn, as an adverse witness to testify

regarding various aspects of City policy and the City=s process of amending the tap fee ordinance. The City

called its own rate expert, Searcy Willis, to controvert Black=s expert witness.

                The district court granted the City=s request for declaratory relief and issued findings of facts

and conclusions of law in support of its judgment. In five points of error, Black appeals that judgment,

contending that the district court erred in finding the City=s tap fees reasonable, valid, and non-

discriminatory. Because we conclude that Black failed to meet his burden of rebutting the presumptive

validity of the City=s tap fee ordinance, we affirm the trial court=s judgment.


        3
             In 1997, the City amended its ordinance to assess tap fees based upon one of five possible
classifications. Killeen, Tex., Code of Ordinances ' 30-102(b). For multi-family dwellings, i.e., apartment
complexes, the City began charging a connection (tap) fee Afor each living unit,@ as opposed to each building
connection, as it had done prior to 1997. See id. ' 30-102(b)(2).




                                                      2
Standard of Review

                We presume a home rule charter provision is valid and will not interfere with matters of

municipal government unless the provision is shown to be Aunreasonable and arbitrary, amounting to a clear

abuse of municipal discretion.@ Dallas Merchant=s & Concessionaire=s Ass=n v. City of Dallas, 852

S.W.2d 489, 490-91 (Tex. 1993); see also City of Brookside Village v. Comeau, 633 S.W.2d 790, 792

(Tex. 1982) (AA city ordinance is presumed to be valid[.]@) (citing Thompson v. City of Palestine, 510

S.W.2d 579, 582 (Tex. 1974); Hunt v. City of San Antonio, 462 S.W.2d 536, 539 (Tex. 1971)). A

person challenging an ordinance bears an Aextraordinary burden@ of establishing that the municipality abused

its discretion in enacting the ordinance. Comeau, 633 S.W.2d at 792-93 (citing Thompson, 510 S.W.2d

579; Waxahachie v. Watkins, 275 S.W.2d 477 (Tex. 1955)). In assessing whether the party attacking an

ordinance should prevail, we Aconsider all circumstances and determine, as a substantive matter, if

reasonable minds may differ as to whether a particular@ ordinance is a reasonable exercise of the

municipality=s authority. Id. at 793. Where the trial court issues findings of fact and conclusions of law, we

apply a sufficiency of the evidence review to the factual findings and review its conclusions of law de novo.

Anderson v. City of Seven Points, 806 S.W.2d 791, 794 (Tex. 1991). Thus, although we rely on the fact

finder to resolve disputed facts and accord those facts the same status as if they were determined by a jury,

the ultimate issue of whether the City=s tap fee is valid is a question of law. See City of Austin v. Travis

County Landfill Co., 45 Tex. Sup. Ct. J. 511, 2002 Tex. LEXIS 34, at *15 (Mar. 28, 2002). The

Uniform Declaratory Judgments Act does not alter this standard of review. See Tex. Civ. Prac. & Rem.

Code Ann. ' 37.010 (West 1997); see also Stephenson v. Leboeuf, 16 S.W.3d 829, 842 (Tex.

                                                      3
App.CHouston [14th Dist.] 2000, pet. denied); Oak Hills Props. v. Saga Rests., Inc., 940 S.W.2d 243,

244 (Tex. App.CSan Antonio 1997, no writ).




                                               DISCUSSION

                 In four points of error, Black contends that the City=s tap fee ordinance is invalid. He

contends that the tap fees (i) Aare unreasonable under every standard for judging the reasonableness of tap

fees@; (ii) discriminate Abetween similarly situated customers and between customer classes without a

reasonable basis@; (iii) are illegal because they constitute impermissible taxation;4 and (iv) are impermissible

impact fees. In his fifth point of error, Black argues that the district court erred in denying his request for

attorney=s fees. Before addressing the validity of the City=s tap fee ordinance, we discuss the home rule

charter=s history to provide the context for analyzing Black=s contentions.


Home Rule Charter

                 Article XI, section 5 of the Texas Constitution authorizes cities having more than five

thousand inhabitants to adopt a home rule charter. See Tex. Const. art. XI, ' 5. Adopted in 1912, the

home rule amendment Aaltered the longstanding practice of having special charters individually granted and

amended by the legislature@ for the State=s larger cities. 22 David B. Brooks, Texas Practice: Municipal

Law and Practice ' 1.17 (2d ed. 1999). The amendment effectively created home rule cities as Amini-

        4
           Because Black did not assert the taxation argument in the court below, he waives the issue on
appeal. See Tex. R. App. P. 33.1(a).




                                                       4
legislatures.@ See id. Thus, cities adopting a home rule charter Apossess the full power of self government

and look to the Legislature not for grants of power, but only for limitations on their power.@ City of Dallas,

852 S.W.2d at 490-91. Accordingly, absent legislation or constitutional provisions to the contrary, a home

rule municipality is free to regulate itself in any manner it chooses. In the context of this appeal, then, we

look to the City=s ordinance to see, not whether the City is authorized to amend the tap fee ordinance as it

did, but whether the amendment is prohibited by some constitutional or legislative restraint on the City=s

authority. See id.


Reasonableness

                Black contends that, A[b]y failing to apply any accepted standard, the trial court erred@ in

finding the City=s tap fees to be reasonable. Whether a duly enacted ordinance is reasonable is a question

of law. See City of Lucas v. North Tex. Mun. Water Dist., 724 S.W.2d 811, 820 (Tex. App.CDallas

1986, writ ref=d n.r.e.) (citing Moncrief v. Tate, 593 S.W.2d 312, 314 (Tex. 1980)). In passing upon

reasonableness, judicial review is limited to determining whether the municipality abused its discretion in

passing the ordinance. Id. at 820. Because Black is challenging the validity of the fee assessment

ordinance, he bears the burden of showing that it is unreasonable. See Comeau, 633 S.W.2d at 792.

Repeatedly recognized by the supreme court as an Aextraordinary burden,@ a showing that a duly enacted

ordinance is invalid requires Black to establish A>that no conclusive or issuable fact or condition existed=

which would authorize the [City]=s passage of the ordinance.@ Id. at 792-93 (quoting Thompson, 510

S.W.2d at 581). To be sure, this standard of review does not require the City to show that its tap fees are

reasonable, but places an affirmative requirement on Black to show that they are not.

                                                      5
                 It is generally accepted that a regulated utility may set its rates to ensure it recoups its cost

of providing utility services. Suburban Util. Corp. v. Public Util. Comm=n, 652 S.W.2d 358, 362 (Tex.

1983); see also James C. Bonbright et al., Principles of Public Utility Rates 1988 (2d ed. 1988) (AA

fair-return or fair-profit standard of reasonable rate levels historically has been accepted with reservations

throughout the United States as a controlling basis of rate regulation with respect to those privately-owned

utility companies that have been granted monopoly status by federal and state governments.@). Although

there are distinctions between public and private utilities, Ain so far as treatment of customers is concerned,

the municipally-owned utility is not different from the privately-owned utility.@ City of Texarkana v.

Wiggins, 246 S.W.2d 622, 625 (Tex. 1952). Recognizing this principle, the Texas Supreme Court set

forth factors for judging the reasonableness of a utility=s rate structure in Texas:


        [A] proper rate determination is based upon consideration of three factors: (1) the utility=s
        reasonable operating expenses; (2) the rate base; and (3) a reasonable rate of return. First,
        there must be a determination by the regulatory authority of the utility=s reasonable
        operating expenses. . . . [T]he next step is the rate base calculation. After the rate base is
        determined, the regulatory authority determines the rate of return, or the percent of the rate
        base which will be recoverable in revenues by the utility.


Suburban Util. Corp., 652 S.W.2d at 362 (citations omitted).5 These principles support the proposition

that in setting its tap fees the City is not limited to charging only for the direct costs associated with providing

customers a connection to the water and sewer utility system. What is not clear, however, is what


        5
            Although Suburban Utility Corp. v. Public Utility Commission involves a Public Utility
Commission order instead of a municipal ordinance, and it relates to rates determined under the utility basis
method, as opposed to the cash basis method, it is instructive for the general principle that a municipal utility
cannot arbitrarily sets its rates. See 652 S.W.2d 358 (Tex. 1983).

                                                         6
additional costs the City may include in the tap fees and to what extent the inclusion of these other costs

impacts the overall reasonableness of the ordinance.

                Black argues on appeal that had the trial court (i) correctly applied Davis v. Bartonville

Water Supply Corp., 678 S.W.2d 297 (Tex. App.CFort Worth 1984, no writ), (ii) not ignored generally

accepted ratemaking principles requiring fees to be based on the costs of providing services, and (iii)

actually considered the magnitude of the tap fee increase and how it compared to rates charged by other

similar utilities in the region, it would have found the City=s tap fees unreasonable. We address each

argument in turn.

                At oral argument and in his brief, Black acknowledged that Bartonville is not completely

analogous to the case at hand. In that case, the court mistakenly employed terminology appropriate for

rates developed using a utility basis method when, in actuality, Bartonville Water Supply Corporation

operated on a cash basis method. See generally id. The parties agree that neither Arate base@ nor Arate of

return@Ctwo of the three factors listed in BartonvilleCare applicable to a utility using the cash basis

method, i.e., the City. Black urges us to read Bartonville as standing for the broad proposition that, Ato

achieve fairness among customers and for economic efficiency, a utility=s rates and charges should generally

reflect the cost of providing a particular service.@ We believe that Black correctly interprets that case as

standing for the general, well-settled ratemaking principles that, in determining its rates, a utility must

consider certain factors and its final rates must be reasonable and not unduly discriminatory. See generally

Suburban Util. Corp., 652 S.W.2d 358. But nothing in Bartonville limits the costs of providing a




                                                     7
particular service to the direct costs associated with physically connecting a customer to the City=s water

and sewer systems. To the extent Black contends otherwise, we reject his interpretation of that case.

                  Having determined the appropriate scope of Bartonville, we conclude that the district court

correctly applied its holding to the case at hand. In Finding of Fact No. 3, the district court found that the

City Aset[] tap fees and rate revenue in an amount sufficient >to maintain and operate the [water and sewer]

system[s] with due regard for anticipated needs to improve, update, construct, and maintain [those]

system[s].=@ The record supports this finding. Even though the City acknowledged that its approximate

cost of physically installing the water tap is $1179 and that its total tap fees exceed that amount, the district

court heard and considered other evidence that would permit it to conclude the overall tap fee rate was

reasonably set.

                  For example, City Manager Blackburn testified at trial that the City went Athrough a series

of meetings . . . relating to cost analysis for tap fees, [such as] committee meetings, hearing from different

staff, [and] that type of process.@ Black asserts, however, that the evidence shows Athat the challenged tap

fees for multi-family dwellings were not based on the actual cost of connecting a building to the City=s water

and sewer systems and setting up an account . . . .@ He further contends that the City did not perform a rate

analysis until Ayears after the challenged tap fees had been set@ and that the eventual analysis Awas not the

basis for the fees.@ Black also relies on the testimony of his expert witness, Bruce Fairchild, who concluded

that the tap fees were unreasonable. Although Black asserts that the evidence he presented satisfied his

burden of proof, his contention ignores the trial court=s role, as fact finder, to assess each of the witnesses=

credibility and conclusions in light of all the evidence. See Turner v. KTRK TV, Inc., 38 S.W.3d 103, 134


                                                       8
(Tex. 2000) (Baker, J., concurring in part, dissenting in part) ( AUnder established Texas jurisprudence, a

reviewing court must defer to the fact-finder=s credibility determinations because the [fact finder] is the

exclusive judge of the facts, the witnesses= credibility, and the weight given to their testimony.@) (citing

Benoit v. Wilson, 239 S.W.2d 792, 796 (Tex. 1951)). That the trial court did not agree with Black or his

expert does not mean it erred. The record includes evidence that, in addition to the City=s direct connection

costs, the district court considered factors such as the City=s cost of updating, improving, and maintaining its

utility system. Thus, we cannot conclude that the district court erred in applying Bartonville.

                 Black next contends that the City=s tap fees are unreasonable because they do not bear a

substantial relationship to the cost involved in connecting his buildings to the utility system. It is well

established that a utility=s final rate must relate to its actual cost of providing the charged-for service.

Suburban Util Corp., 652 S.W.2d at 362; see also Charles F. Phillips, Jr., The Regulation of Public

Utilities, Theory and Practice 301 (1988) (AThere has always been general agreement that the price for

the service of a public utility should be high enough to cover operating expenses, depreciation, and taxes,

and also allow a fair return on the fair value of the capital invested in the business.@). Typically, a utility

operating on a cash basis, like the City, classifies its costs according to its expenses associated with

customer service, use, meter reading, billing, accounting and collection expenses. John Baur, Effective

Regulation of Public Utilities 39 (1925); see also Niles v. Chicago, 558 N.E.2d 1324, 1332 (Ill. App.

Ct. 1990) (ACash basis accounting determines basic revenue requirements by adding up operation and

maintenance expense, debt service requirements, and capital expenditures that are not debt financed.@);

Phillips, supra, at 766 (explaining revenue determined on a cash basis method includes Aoperating and


                                                       9
maintenance expenses, debt service, payment in lieu of taxes, and plant extension, replacements, and

improvements@). To meet his burden of establishing that the City=s tap fee ordinance is unreasonable based

on the City=s cost of providing utility services, Black must show, not that the City=s fees exceed its actual

costs of connecting his buildings to the utility system, but that the fees bear no relationship to the City=s

expenses in providing him such services.

                At trial, Fairchild testified that


        a fair and reasonable rate is regarded as one that approximates the cost of providing the
        service. And the City has admitted that the [$]1179 is the approximate cost of installing a
        two-inch water meter, and the $300 is the approximate cost of installing a sewer tap, and
        Mr. Black in both 1998 and 2000 was charged well in excess of that cost of providing the
        service that he received; therefore, those are unreasonable tap fees.


This assertion erroneously defines the cost of service as merely the cost to the City of providing Black the

physical connections to its water and sewer systems. But experts for both parties acknowledged that tap

fees may include the City=s direct and indirect costs associated with providing water and sewer

connections. Black agrees that, at a minimum, the Aservice provided to a landowner is a physical

connection of the new customer to the water and sewer system [and] also includes the administrative act of

setting up an account for billing and services purposes.@ Black=s evidence, however, establishes only that

the City=s actual cost of physically connecting a customer to its utility system with a two-inch tap is

approximately $1179; he adduced no evidence regarding the City=s indirect costs.

                Instead of showing the City=s cost of service, Black attempts to satisfy his burden by arguing

that the tap fees are unreasonable because the City admits to including operation and maintenance costs in


                                                     10
both its monthly rates and tap fees: AAccording to Fairchild, those costs should be recovered by the City

through its monthly water and services charges, not through its tap fees.@ Black does not establish,

however, that such a practice is impermissible or that the City is actually recovering more than its costs of

providing Black utility services. Without showing that the City=s tap fees bear no relationship to the City=s

cost of service as defined above, Black cannot satisfy his burden of establishing that the tap fees are

unreasonable. The trial court found that the City set its tap fees Awith due regard for [its] anticipated needs

to improve, update, construct, and maintain the system.@ This conclusion is supported by the evidence.

                 City Manager Blackburn testified at trial and in deposition that, although the City did not

perform an Aindependent outside cost-of-service study,@ it Adecided to institute [the] per-living-unit fee . . .

because the demands on the City water and sewer system . . . and the continuing demand for maintaining

and operating the system for multi-family buildings causes a greater demand on the system.@ While there is

ample testimony concerning general ratemaking principles and speculative City practices, there is no

evidence to controvert Blackburn=s testimony. Further, it is undisputed that the City may recover costs

related to servicing demands. Without establishing a direct connection between the City=s actual costs and

assessed fees, Black could not show that the City=s tap fees are unreasonable. Neither Black=s nor

Fairchild=s conclusory statements and conjecture are sufficient to establish this link and satisfy Black=s

onerous burden. In the absence of evidence that the City actually assesses tap fees in excess of its total

service costs, we hold that the record supports the trial court=s findings that the City properly set its tap fees

and that they are not unreasonable as they related to the City=s cost of providing Black utility services.




                                                       11
                 Black=s final argument regarding the unreasonableness of the City=s tap fees asserts that the

magnitude of the tap fee increase, combined with a comparison of rates charged by other similar utilities in

the region, shows that the City=s tap fees are unreasonable.6 Black testified that the tap fees for his 1998

and 2000 buildings increased over 1000% from those assessed on his three buildings built before the 1997

amendment took effect. He also explained that, based on his survey of other regions, the City=s tap fees

were disproportionately high. Although this circumstantial evidence shows that the City=s tap fees are higher

than other regions, such evidence is not determinative in deciding whether the City=s tap fees are

unreasonable. See Bartonville, 678 S.W.2d at 300.

                 While we recognize that concrete evidence may be difficult to procure, we are limited by the

standard of review to determining whether Black established by competent evidence that the City=s tap fees

are in fact unreasonable, i.e., they bear no relationship to its costs of providing utility services. Simply

showing that tap fees increased and/or are greater (even if significantly so) than other regions falls far short

of the proof required to prevail. Without some evidence of the City=s actual expenses for providing utility


        6
             In his brief, Black states, AWhile these factors alone may not prove that the tap fees are
unreasonable, when considered in conjunction with the analysis of the evidence [of the district court=s
misapplication of Bartonville and the fact that the fees do not relate to the City=s cost of service], all of
these factors in combination make the tap fees per se unreasonable.@ Having rejected Black=s arguments
regarding Bartonville and the City=s cost of service, we analyze whether the magnitude of the increase and
rate differential between other regions alone are sufficient to show the City=s tap fees are unreasonable.




                                                      12
service (per the standards set forth above), it necessarily follows that Black cannot carry the substantial

burden of establishing the unreasonableness of tap fees. We hold that neither the evidence regarding the

magnitude of the increase nor of the differential between other regions= tap fees is sufficient to establish that

the City=s tap fees are unreasonable. Having rejected each of Black=s contentions regarding the

reasonableness of the City=s tap fees, we overrule his first point of error.


Impact Fee




                                                      13
                 Black next argues that the tap fees assessed by the City constitute impermissible impact

fees.7 This is so, Black argues, because the tap fees assessed by the City exceed its cost of providing utility

service, and the City uses those excess funds to expand its water and waste facilities.8 The City

acknowledged, in response to a request for admission, that the actual costs for physically connecting a

building to the water tap is $1179 for a two-inch tap (the same size that services Black=s buildings). The



        7
            An impact fee is

            a charge or assessment imposed by a political subdivision against new development in
            order to generate revenue for funding or recouping the costs of capital improvements or
            facility expansions necessitated by and attributable to the new development. The term
            includes amortized charges, lump-sum charges, capital recovery fees, contributions in
            aid of construction, and any other fee that functions as described by this definition.

Tex. Loc. Gov=t Code Ann. ' 395.001(4) (West Supp. 2002).


        8
            Having already addressed Black=s argument regarding the City=s cost of service in providing tap
connections, we limit our discussion here to determining only whether the City uses tap fee revenues to fund
new development.




                                                      14
City asserts, however, that because it does not use any funds collected as tap fees to fund new

development, its tap fees are not impact fees.

                 An ordinance assessing impact fees is invalid unless it complies with the procedures outlined

in Texas Local Government Code chapter 395. See Tex. Loc. Gov=t Code Ann. '' 395.011-.013, .041-

.058 (West 1999 & Supp. 2002). A fee is not an impact fee merely because it is greater than the actual

cost associated with the service for which it is assessed. See Bartonville, 678 S.W.2d at 299. Instead, the

fee must impose upon a new development the burden of generating Arevenue for funding or recouping the

costs of capital improvements or facility expansions necessitated by and attributable to the new

development.@ Tex. Loc. Gov=t Code Ann. ' 395.001(4) (West Supp. 2002). Thus, to prevail Black must

establish that the City uses revenue generated from its tap fees to fund expansion of the utility service to

serve new development.

                 Black=s expert witness testified at trial regarding his opinion about whether the challenged

tap fees are effectively impact fees. Fairchild stated:


        It=s my opinion that the $300 fee for each additional water connection and the $300 fee for
        each additional sewer connection, both of which are charged based on the number of living
        units, not on the number of taps, are effectively impact fees. That even though they=re
        called tap fees they have all the characteristics of an impact fee because they are essentially
        assessed above the costs of providing the tap and they are on a living unit equivalent basis
        which is how impact fees are typically assessed.


Explaining further, Fairchild testified:


        Well, there=s two other items that suggest that they are more akin to impact fees than they
        are to tap fees. One of those is when they are assessed . . . . [T]ap fees are normally

                                                     15
        assessed at the time the tap is actually made; whereas impact fees are . . . more often
        [assessed] early in the process, either at when you get a building permit or something prior
        to actual installation. Secondly, the history . . . of where the earlier ordinance adopting this
        set of tap fees had the moneys from tap fees specifically designated to go into an extension
        fund or a fund that was intended to finance extensions of the Killeen water and sewer
        system.


Fairchild further testified that his conclusionCthat the City=s tap fees are impact feesCfound support from

the fact that various annual budgets and records of municipal services provided Aevidence that revenue from

the tap fees [was] being used by the City to . . . pay for capital improvements and facility expansions.@

Fairchild=s principle support for this argument came from the fact, Athat Water and Sewer Tapped Revenues

are included in the total revenues of the system. In other words, they=re deposited in the Water and Sewer

Fund. And out of that same fund . . . capital improvement projects are also funded from the Water and

Sewer Fund.@

                Fairchild=s testimony distills into the following arguments: the tap fees are in actuality impact

fees because (i) they are assessed above the cost of providing the tap connection, (ii) they are assessed

before the tap is actually made, (iii) earlier versions of the ordinance required the tap fee revenues to be

deposited in an account designated to fund extensions of the City=s water and sewer system, and (iv) the

revenue derived from the tap fees is currently deposited into a general Water and Sewer Fund which also

funds capital improvement projects (new development extensions). The City contends that a fee is not an

impact fee unless it generates revenue for funding or recouping the costs of new development. See Tex.

Loc. Gov=t Code Ann. ' 395.001(4). At trial, Fairchild defined impact fees as Adollars to be used for

capital improvements.@ It appears that the parties agree, as do we, that unless the revenues generated from


                                                      16
tap fees are actually used for capital improvements, they are not impact fees. The dispositive inquiry, then,

concerns how the fees are ultimately used, as opposed to how or when they are calculated or collected.

For this reason, only Fairchild=s last two arguments are relevant to our determination of whether the City=s

tap fees are impact fees.

                 The trial court determined that the City Auses the revenue generated by water and sewer tap

fees >to maintain and operate the system with due regard for anticipated needs to improve, update,

construct, and maintain the [utility] system.=@ Although Black and Fairchild argue that the City=s actions

prior to the 1997 amendment to the tap fee ordinance are evidence of its intent to raise revenue for the

expansion of the utility infrastructure made necessary by new development, they offer no evidence of how

the tap fees were spent during the relevant time period. We acknowledge the difficulty of tracing the tap

fees after they are deposited in the general Water and Sewer Fund, but we cannot relieve Black of his

burden of showing that funds are actually being used to pay for expansion due to new development.

Further, this burden cannot be satisfied by reference to the City=s past practices; nor is it sufficient for Black

to allege that the Arecord includes evidence that the City may use tap fee revenue to pay for capital

improvements and facility expansion.@ (Emphasis added.)

                 At trial, Black made no attempt to show directly how the City funded facility expansion.

The City=s Director of Finance, Connie Green, testified in deposition that A[t]he City uses a consolidated

cash account [so that] . . . transactions that affect each individual fund are accounted for separately . . . and

can be easily identified.@ Green further stated that: generally all City appropriations are made in the budget;

a project funded during the budgeting process will receive a number code; each department submits


                                                       17
payment requisitions with the predetermined code; and the finance department, using the predetermined

codes, processes the transactions and charges them to the appropriate departments. Neither party called

Green as a witness at trial. Despite the apparent availability of City records concerning facility expansion

costs, Black failed to establish the City=s actual practice of funding new development. City Manager

Blackburn=s testimony regarding the general practice of the City=s funding new development is alone

insufficient to establish that the City uses tap fee funds for new development expansion.9

                Because the record contains no analysis of the City=s total costs of providing service or the

source of funding for new development expansion, we cannot disagree with the trial court=s finding of fact

that the City Adoes not use tap fees to fund the costs of capital improvements or facility expansion

necessitated by and attributable to new development.@ Accordingly, we hold that Black failed to meet his

burden of establishing that the City=s tap fees are impermissible impact fees. We overrule his fourth point of

error.


Price Discrimination




         9
             Black adduced testimony from Blackburn that capital improvements and facility expansion are
paid for by issuing revenue bonds and that the City does not pay those expenses from its operating account.
 Black=s expert testified that this practiceCdepositing revenues generated from the City=s tap fees into the
general Water and Sewer FundCis typical of municipalities.




                                                     18
                 Black next contends that the City=s tap fees are discriminatory Abecause they do not relate

to the level of service provided to each@ multi-family building. This is so, according to Black, because Aeven

though the tap fee is applied uniformly across the multi-family customer class, relative to the service that [is]

provided, one customer pays more for the same service than another customer.@ At the outset, we

recognize that not all price discrimination is condemned, but only Adiscrimination that is arbitrary and without

a reasonable fact basis or justification.@ Caldwell v. City of Abilene, 260 S.W.2d 712, 715 (Tex. Civ.

App.CEastland 1953, writ ref=d); see also Wiggins, 246 S.W.2d at 624 (stating that a utility service Amay

not discriminate in charges or service as between persons similarly situated . . . unless there is some

reasonable basis for a differentiation@); City of Galveston v. Kenner, 240 S.W. 894, 895 (Tex. 1922)

(explaining that utility Aservice must be given without discrimination between persons similarly situated or

under circumstances substantially the same@). To be sure, public utilities are under a legal duty to charge

reasonable rates and ensure that they are not unduly discriminatory.10 James C. Bonbright et al., Principles

of Public Utility Rates 515 (2d ed. 1998). It is well established, however, that municipalities have the right

to classify customers Abased upon such factors as the cost of service, the purpose for which the service or


        10
              Price discrimination is assessed against a two-pronged test: (i) reasonableness of rates and (ii)
whether the rates are unduly discriminatory. James C. Bonbright et al., Principles of Public Utility Rates
515 (2d ed. 1998). Discrimination Aoccurs when a seller establishes for the same product or service
different rates which are not entirely justified by differences in cost, or the same rate where difference in cost
would justify differences in price.@ Charles F. Phillips, Jr., The Regulation of Public Utilities, Theory and
Practice 62 (1988). The two bases for price differentiation are Acost of service@ and Avalue of service.@
Id. at 411. When rates are based upon demand, impermissible discrimination occurs; however, A[a] seller
does not [unduly] discriminate when rates are based upon costs, even though some customers pay more
than others.@ Id. at 411. Price discrimination is permitted because it may be more expensive to serve some
customers than others. Id. at 411-12. Accordingly, we recognize that discrimination may reflect policy
considerations on the part of the utility to limit the demands of certain customers on its resources.

                                                       19
product is received, the quantity or amount received, the different character of the service furnished, the time

of its use or any other matter which presents a substantial difference as a ground of distinction.@ Gillam v.

City of Fort Worth, 287 S.W.2d 494, 497 (Tex. Civ. App.CFort Worth 1956, writ ref=d n.r.e.). But in

classifying its customers, municipalities Amay not discriminate in charges or services as between those

similarly situated.@ Wiggins, 246 S.W.2d at 625. No rule of thumb exists for determining whether

customers are similarly situated. Ford v. Rio Grande Valley Gas Co., 174 S.W.2d 479, 480 (Tex.

1943). The question of discrimination is one of fact and must be decided on a case-by-case basis,

recognizing that


        [w]hether differences in rates between classes of customers are to be made, and, if so, the
        amount of the differences, are legislative rather than judicial questions, and are for the
        determination of the governing bodies of the municipalities. The presumption is in favor of
        the legality of the rates established by the rate-making authority, and courts may interfere
        only in clear cases of illegality.


Gillam, 287 S.W.2d at 497. The burden of proof remains at all times upon the party claiming a fee is

unreasonably discriminatory.11 Caldwell, 260 S.W.2d at 714; Ford, 174 S.W.2d at 480.


        11
             In arguing that he should prevail because the City Afailed to meet its burden of showing that [its]
discrimination was reasonable and justified[,]@ Black improperly assigns his burden to the City. Black=s
assertion Athat the record is completely devoid of any evidence . . . that the City considered [any] factors in
calculating [its] rates and establishing the tap fee methodology for multi-family tap fees@ also confuses the




                                                      20
burden of proof. The burden to establish that the tap fees are unduly discriminatory rests with Black and
cannot be satisfied by reference to what evidence the City failed to produce. See Ford v. Rio Grande
Valley Gas Co., 174 S.W.2d 479, 480 (Tex. 1943).


                                                   21
                 Black argues that the tap fees are discriminatory because only multi-family customer tap fee

charges include operating and maintenance expenses for the entire utility system; thus, Atap fees for single

family dwellings recover only the approximate cost of making the connection, while the tap fees for multi-

family dwellings are far in excess of the cost of installation of the tap.@ The City=s position is that per living

unit assessments are permissible and nondiscriminatory. The City argues that Black=s contentions do not

take into account that Ait would be nearly impossible to devise a system that perfectly correlated rates

assessed to the number of persons using the system@ and that the City, Ain its discretion, has determined that

assessing tap fees on a per >living unit= basis reasonably recognizes costs associated with [the] increased

demand@ that multi-family buildings place on the system. We agree with the statement of our sister court in

a similar case involving a challenge to an ordinance requiring some water customers to pay higher rates than

others: AThe interest and needs of the numerous water users served by a city are such that it is improbable,

if not impossible, that any classification or rate basis could be devised which would not in some way

discriminate against some users.@ Caldwell, 260 S.W.2d at 715.

                 The City was well within its authority to set its tap fees. It was Black=s burden to show that

the City=s tap fee structure assessed different rates for different classes of customers and that such a

Adistinction [was] not justified by the difference in factors properly@ considered by the City in establishing

the rate structure. Gillam, 287 S.W.2d at 497. Black asserts that, because the City=s monthly water rates

account for operations and maintenance costs, the City cannot also include those costs in assessing its tap

fees. The City ordinance assesses tap fees based upon one of five classifications: (i) residence (one

connection charge); (ii) multi-family (one connection charge for each living unit); (iii) commercial (one


                                                       22
connection charge for each certificate of occupancy issued or meter, whichever is greater); (iv) industrial (as

authorized by city council); and (v) mobile home park and manufactured home subdivisions (one connection

charge for each living unit). Killeen, Tex., Code of Ordinances ' 30-102(b). On its face, the ordinance

permits the City to assess each occupant of a building a connection charge; that there are more occupants in

multi-family dwellings and commercial properties does not make the tap fee structure per se discriminatory.

Black points to no evidence in the record to support his position that the City is prohibited from recouping

a portion of its operation and maintenance costs through its tap fees. Thus, on the record before us, we

cannot say the trial court erred in finding that Black failed to establish that the City=s tap fees are unduly

discriminatory, that is, that the City=s reasons for discriminating were not justified by reasonable bases.

Accordingly, we overrule Black=s second issue.

Attorney=s Fees

                 Black=s fifth point of error challenges the trial court=s denial of his request for attorney=s fees.

Under the Uniform Declaratory Judgments Act, a trial court may award attorney=s fees Aas are equitable

and just.@ Tex. Civ. Prac. & Rem. Code Ann. ' 37.009 (West Supp. 2002); Brainard v. State, 12

S.W.3d 6, 27 (Tex. 1999). When a trial court denies claims for attorney=s fees under the Act, its decision

is reviewed for an abuse of discretion. See Bocquet v. Herring, 972 S.W.2d 19, 21 (Tex. 1998).

Whether a party prevails in a declaratory judgment action is not a determining factor in awarding attorney=s

fees. See Commissioners Court v. Agan, 940 S.W.2d 77, 82 (Tex. 1997); Barshop v. Medina County

Underground Water Conservation Dist., 925 S.W.2d 618, 637 (Tex. 1996). Because Black presents




                                                        23
no evidence on appeal that the trial court abused its discretion, we overrule his fifth point of error and affirm

the trial court=s judgment denying his request for attorney=s fees.


                                              CONCLUSION

                 Black failed to establish that the City=s tap fees are unreasonable because there is no

evidence that such fees are in excess of the City=s cost of providing utility services. Further, without proof

of the City=s actual expenditures, Black failed to show that the City impermissibly uses tap fees to fund new

development and is thus an impact fee. Finally, because Black did not establish that the City lacks a

reasonable basis to classify customers differently, he also failed to establish that the tap fees are

discriminatory. Black did not carry his substantial burden of establishing that the City=s tap fee ordinance is

invalid. Thus, we cannot say that the trial court=s judgment in the City=s favor is incorrect. Accordingly, we

overrule Black=s five points of error and affirm the trial court=s judgment.




                                                    Jan P. Patterson, Justice

Before Justices Kidd, Yeakel and Patterson

Affirmed

Filed: May 31, 2002

Publish




                                                       24
