August 22, 2011
Dear City Recorder:
Under Section 18-707 of the Municipal Code, the City provides for water services to
multiple water services through a single meter. That ordinance provides that generally
residential, commercial and industrial customers shall be served by a separate water meter, but
that, “Where it is determined by the city to be impractical to meter each residential, commercial,
or industrial customers with a single meter the city water department shall bill each occupied
separate residence, commercial business, or industrial customers a minimum monthly bill for
each individual unit.” Under that ordinance, those customers are entitled to receive credit “for
periods of time that the premises is vacant and no water is used for a particular unit,” provided
that the tenant gives notice of the vacancy within a time prescribed by the ordinance. However,
single family residences used as rental property by their owners are not entitled to the credit for
vacancies that occur on such property.
The city’s question is whether difference between the treatment of single family
residences served by a single meter but used by their owners as rental property, and the owners
of residential (and presumably commercial and industrial property) receiving water service
through a single meter with respect to how vacancies are billed for those two classes of water
customers are handled by the city legal?
The answer depends on whether the city can find a rational basis for distinguishing
between how the two classes of property owners are treated, generally tied to the cost of
providing the water services. I have been unable to come up with a satisfying rational basis for
the difference. That answer sounds simple, but as will be seen below, the burden of proving
utility rates are discriminatory is on the person alleging the discriminatory rates. In addition, I
will point to one case involving higher rates charged to higher rates charged to property owners
of apartment buildings than water and sewer rates charged to property owners of other classes of
property served by a single meter as illustrative of how complex that burden of proof can
become.
There are apparently two different standards for measuring utility rate differentials. It is
said in Building Owners and Managers Association of Metropolitan Baltimore, Inc. v. Public
Service Commission of Maryland, 93 Md. App. 741 (Ct. Special App. Md. 1992), that:
There are essentially two bases or standards for price
differentials among classes of users—cost of services and
value of services. See C. Phillips, The Regulation of Public
Utilities, Ch. 10 (1988). The first is based on the
acknowledged fact that it is more expensive to serve some
customers than others; rate differentials are therefore based
on what it costs the utility to serve each class, to the extent
that one can calculate those costs. The value of service
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standard, on the other hand, is based on differences in
demand among the classes of customers—their need for the
service, their ability to pay for it, and the availability of
alternatives. [At 754]
The same case concludes that, “As affecting rate design….when directed to courts, the idea that
cost of service date is legally required has been universally rejected.” [At 760] In CF Industries
v. Tennessee: Public Service Commission, 599 S.W.2d 536 (Tenn. 1980), the same appears to be
true of utility rates set by the Tennessee Regulatory Authority (formerly the Tennessee Public
Service Commission). The court declared in that case that:
The polestar of public utility rate establishment and
regulation is the ‘just and reasonable’ requirement of
Section 65-518, T.C.A. There is no statutory nor decisional
law that specifies any particular approach that must be
followed by the Commission. Fundamentally, the
establishment of just and reasonable rates is a value
judgment to be made by the commission in the exercise of
its sound regulatory judgment and discretion….
Specifically, there is no requirement that any rate case that
the Commission receive and consider cost of service data,
or that such data, if in the record, are to be accorded
exclusivity. It is self-evident that the cost of service is of
great significance in the establishment of rates but is of
lesser value in arriving at rate design. A fair rate of return
to the regulated utility is one thing; the establishment of
rates among various customer classes is quite another….
Moreover, the intrinsic value of the service rendered, while
not controlling, is a proper element of consideration and is,
perhaps, of more value in establishing customers than in
determining a fair rate of return to the utility itself. [At
542]
However, those cases appear to apply to utility rate cases resolved by state public service
commissions, and the rates set by municipal utilities in Tennessee are not regulated by the
Tennessee’s Regulatory Authority. In cases involving rates set by municipal utilities, Tennessee
appears to follow the cost of services method of analysis of utility rates. A fundamental
principle governing the provision of all utilities in Tennessee is that they must be provided
without discrimination to all applicants of the same class, and that class distinctions must be
reasonable, generally based on the cost of providing service. [See J.W. Farmer v. Mayor and
City Council of Nashville, 127 Tenn. 509 (1912); Watauga Water Co. v. Wolfe, 99 Tenn. 429
(1897); Surly v. Watauga Water Co., 99 Tenn. 419 (1989); City of Parsons v. Perryville Utility
District, 594 S.W.2d 401 (Tenn. App. 1979). Also see Memphis Light, Gas & Water Division v.
Auburndale School System 705 S.W.2d 652 (Tenn. 1986), and unreported Clarksville
Department of Electricity v. Mathews Nissan, Inc., 1999 WL 180308 (Tenn. Ct. App). 1999 WL]
Parsons v. Perryville Utility District, says:
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A classification must, however, in order to be valid, comport with
the rule or principle of sound legislative classification, in that there
must be some actual difference of situation and condition, bearing
a reasonable and just relation to the matter of rates; and an
arbitrary or unreasonable classification amounts to unjust
discrimination. Likewise, it is unjust discrimination to differentiate
between different services by charging rates for one which are out
of all proportion as compared with the rates charged for another,
or to impose on one consumer, or class of consumer, losses caused
by charging inadequate rates to another consumer or class. [At
406] [Court’s emphasis]
That quote applied to water service extensions, but the same rule applies to rate
discrimination in general. Moreover, Tennessee Code Annotated, § 7-34-115, which, although it
is found in the Revenue Bond Law, clearly applies to all municipal utilities in Tennessee, says,
“Notwithstanding the provisions of any other law to the contrary, as a matter of public policy,
municipal utility systems shall be operated on sound business principles as self-sufficient
entities. User charges, rates and fees shall reflect the actual cost of providing the services
rendered….”
But the heavy weight of authority arising from rate discrimination cases in the United
States is that the person alleging that the rates are discriminatory bears the burden of proving the
discrimination. That burden has proven very difficult for persons challenging utility rates to
carry. [See 4 ALR2d 595]
The recent Kansas Supreme Court case of Eudora Development Company of Kansas v.
City of Eudora, 78 P.3d 437 (Kan. 2003) is illustrative of how difficult that burden can be to
carry. There, an ordinance “provided a schedule for charges per gallon of water, and in addition,
provided that when a single water meter provided service to one or more domestic units, the
applicable rates would apply to only one domestic unit, and in addition, there would be a
surcharge of $6.00 for each additional domestic unit.” The same ordinance “also proved that
where multi-unit buildings were served by one water meter, each domestic unit would pay a
minimum service bill of $4.00 per month, and, in addition, would pay a sewer treatment charge
of $0.60 for each 1,000 gallons purchased over and above 5,000 gallons.” A “domestic unit” for
the purpose of the ordinance “shall include residence, mobile home, each separate apartment,
cottage or cabin, condominium or individually owned apartment.” The charges changed over
the years, said the court, but “some type of charge per domestic unit remained in place
throughout the entire period.” [At 628]
The plaintiffs in that case were the owners of two apartment complexes. In the court’s
own words, “Plaintiffs have established that multi-family buildings with a single meter are
charged for water and sewer services in a different manner than are single family units or multifamily buildings with one meter per unit.” [At 630] The obvious difference is that those
plaintiffs were paying more for water and sewer than the other single-metered rate payers.
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But the showing of that fact did not carry the day for the plaintiffs. “Neither the common
law nor the statutes forbid reasonable classification of rates or discrimination so long as it is not
unjust but is reasonable in view of substantial differences in services or in conditions of
service,” declared the court. [At 630] [Citations omitted by me.] The court continued:
If there is any rational basis for distinguishing between
owners of multi-unit buildings having only one water meter
and other uses who have a meter in each domestic unit, the
classification must be upheld. The defendants suggest that
the surcharges are justified for two reasons: (a) to equalize
the cost between multi-unit buildings where the owner paid
for only one meter for multiple domestic units as compared
to a single family residence or multi-unit building where an
initial meter installation was paid for each domestic unit,
and (b) to obtain payment for the dense impact imposed
upon the utility systems by multi-unit buildings having only
one meter as opposed to single family residences or multiunit buildings having a meter in each domestic unit. [At
630]
The plaintiffs put on an expert witness who concluded from an analysis of the city’s
ordinance that the water and sewer rates were discriminatory (which on the face of the ordinance
was clearly true, but not necessarily legally true). The court rejected his testimony, declaring
that:
He did not analyze whether the sewer usage for the
apartment dwellers and single family dwellers in the City
of Eudora follows what he claims is the national average.
He did not review a compilation of data concerning the
City of Eudora’s water and sewer utility regarding the costs
of storage facilities, transmission and distribution lines,
transportation equipment, labor and other expenses and the
number of meters by size. He did not analyze the cost to
the City of Eudora of installing two (2”) inch line master
meters for apartment complexes or three-quarter (3/4”) inch
line for single meter family dwellings. He has not
reviewed any data regarding the size of the transmission
mains or other operational aspects of the Eudora system.
Mr. Sankpill did not review the cost charged by the City for
the installation of master meters for apartment buildings as
opposed to the cost charged for installation of single family
meters. He has not analyzed any City records to determine
if there is a difference in cost to the City of providing sewer
services to a single family residence as opposed to
providing it to a multi-family building with one meter. Mr.
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Sankpill has reviewed no information other than the
ordinance, that is specific to Eudora… [At 631]
For those reasons, concluded that court, “Plaintiffs have failed to come forward with
evidence to negate that there is a rational basis for the difference in rates. They have failed to
come forward with any facts of evidentiary value that the rate classifications are unjust or
unreasonable. Having failed to establish the essential elements of their claim, defendant is
entitled to summary judgment.” [At 631]
I am not sure the Tennessee courts would demand the degree , quantity and quality of
proof as did the court of the plaintiff in Eudora, especially where, as in your City, the objection
to the rate “differential” is based on the difference in the way the city treats vacancies: in effect
it does not charge for water service in vacant units in single metered residences, commercial
businesses and industries, but does charge single family residences rented out by their property
owners when their property is vacant. Under the ordinance in Eudora, above, owners of multiunit apartments being served by a single meter paid more for water service, at least on the face of
the ordinance, than did single unit residences served through a single meter.
Based upon the cost of providing water service, I have looked in vain for a rational basis
for the City, to give the owner of apartment complexes served through a single meter preferential
treatment with respect to its treatment of vacancies. It does occur to me that it may be cheaper
for the city to provide water service to apartment complexes served by a single meter than single
family residences served through a single meter. Where all the apartments are clustered together
in one housing unit it may be easier and quicker for the city to obtain or verify for itself
information about whether apartments are or are not vacant in any given period as opposed to the
same information concerning single family residences. It may be that the city can point to other
rational bases. But I have a difficult time seeking any significant difference in the cost of
providing water services to either class of customers.
Sincerely,
Sidney D. Hemsley
Senior Legal Consultant
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