Knowledgebase-Utilities Must Charge Reasonable Rates

Information Product

Title:Utilities Must Charge Reasonable Rates
Summary:MTAS was asked for the definition of the term “reasonable rates” within the meaning of the utility statutes and cases in Tennessee that require utility rates to be reasonable.
Original Author:Hemsley, Sid
Product Create Date:01/04/99
Last Reviewed on::12/05/2016
Subject:Utilities--Rates and charges
Type:Legal Opinion
Legal Opinion:

Reference Documents:

Text of Document: You have the following question: What does the definition of the term “reasonable rates” within the meaning of the utility statutes and cases in Tennessee that require utility rates to be reasonable?

As far as I can determine, that term in that context has never been defined in Tennessee. However, apparently utilities in all states must charge reasonable rates, and the meaning of that term has been tackled by the courts in several jurisdictions:

Barr v. First Taxing District of the City of Norwalk, 192 A.2d 872 (Conn. 1963) (Water rates for outside users):

Whether a rate is reasonable or unreasonable is primarily a question of fact, depending largely on the circumstances of the particular case. New Haven v. New Haven Water Co., 118 Conn. 389, 402, 172 A. 767. A reasonable rate for nonresident users should include fair compensation for the services rendered and should yield a fair return to the municipal supplier on the value of the property as a going concern used for the public. A reasonable discretion must abide in the officers whose duty it is to fix rates, and their decision should not be set aside unless it is proved that the rates are excessive and their action illegal. Faxe v. Grandview, 48 Wash.2d 342, 351, 294 P.2d 402. [At 875]

Simons v. City of Charleston, 187 S.E. 545 (S.C. 1936) (Rates set by municipal waterworks):

As we have hitherto pointed out, the Constitution, while investing municipalities with the right to operate waterworks systems, has limited their power to charge, by directing that “reasonable” rates must be maintained. But even in the absence of this constitutional restriction, the court would hold that the rates charged must be reasonable. A waterworks is a public utility, and it makes no difference whether such utility be operated by a municipality or by a private corporation. Both are bound by the rule of reasonableness. As stated in 6 McQuillin on Water and Water Rights, 654, “municipally owned water works stand in no better position in regard to water rates than privately a owned system.” See, also, 27 R.C.L. 1443.

The petitioner’s idea seems to be that “reasonableness” contemplates a rate sufficient only to maintain and operate a system, which would mean that the cost of the erection for the original system, and any necessary additions, must come from the general tax fund. If that is her position, she has mistaken the nature of water rent, which is not in any just sense a tax. “Water rates are imposed and collected merely as compensation or equivalent to be paid by those who choose to receive and use the water.” 27 R.C.L. 1436. A municipality may charge a rate that will yield a fair profit, just the same as a private corporation. The fact that it makes a profit does not show that the rate is unreasonable. The service received is the test. 67 C.J. 1243. [At 547.]

Wichita Gas Co. v. Public Service Commission of Kansas, 2 F. Supp. 792 (Dist. Kansas, First Div. 1933) (Distribution and sale of natural gas to domestic and industrial users):

A “reasonable rate” is not a particular decimal. A “reasonable rate” is one that falls within the zone of reason. It is a field, and not a mathematical point. The lower limit of the zone of reason is confiscation, that is, a denial of a net return sufficient to preserve the property and to attract capital necessary to enable the utility to discharge its public duties. A finding that a particular rate is reasonable is not, therefore, a finding that every other rate is either unreasonable or confiscatory.

Within the determination of the proper rate within that zone of reason, the courts are not concerned, for that is a legislative matter. As jurisdiction is invoked here, and generally in such cases, the courts decide but one question: Does the prescribed rate fall below the lower limit of the zone?.... [At 799.]

Wisconsin Telephone Co. v. Public Service Commission, 287 N.W. 122 (Wis. 1939) (Telephone rates):

It is evident that the reasonable rate to be found by the Commission lies somewhere between the lowest rate that is not confiscatory and the highest rate that is not extortionate. In other words, despite what was said in Minneapolis, St. P. & S.S. M.R. Co. v. Railroad Comm., 1908, 136 Wis. 146, 116 N.W. 905, 17 L.R.R., N.S., 821, it is apparent that there is more than one rate that may be a just and reasonable rate.... [At 149.]

We now enter upon a consideration of the question, whether the rate established is reasonable. The company contends that the rate established by the final order is unreasonable to the extent of being confiscatory. The commission on the other hand contends that the rate established is reasonable and should be sustained. Since Smith v. Ames, 1897, 169 U.S. 4676, at page 5467, 18 S.Ct. 418, 42 L.Ed. 819, it has been established that a public utility is entitled to earn a fair return upon the fair value of the property used by it in the rendition of service to the public. Since that decision a great body of law has been developed which has been reconsidered and restated in State v. Tristate Telephone-Telegraph Co., 1938, Minn. 284 N.W. 294, and Pacific Telegraph & Telephone Co, v. Wallace, 1938 158 Or. 210, 75 P.2d 942.

As a basis for establishing a reasonable rate certain fundamental facts must be ascertained: (1st) The fair value of the property used and useful in rendering the service; (2d) the amount of income which will probably be produced by the rate to be established; and (3d) what constitutes a fair return. [At 149-50.]

Salt River Valley Canal Co. v. Nelssen, 85 P. 117 (Ariz. 1906) (Irrigation rates set by canal company):

In determining what is a reasonable price to be charged for its services by a public corporation and examination must be made not only from the point of view of the corporation, but from that of the one served, also. A reasonable rate is not one ascertained solely from considering the bearing of the facts upon the profits of the corporation. The effect of the rate upon person to whom services are rendered is as deep a concern in the fixing thereof as is the effect upon the stockholders or bondholders. A reasonable rate is one which is as fair as possible to all whose interests are involved. In Covington, etc., Turnpike Company v. Sandford, 164 U.S. 578, 596, 17 Sup. Ct. 198, 205 (41 L. Ed. 560), the Supreme Court of the United States had under consideration the question what was a reasonable toll to be charged by a turnpike company. The Court said: “It cannot be said that a corporation is entitled, as of right, and without reference to the interest of the public, to realize a given per cent upon its capital stock. When the question arises whether the Legislature has exceeded its constitutional power in prescribing rates to be charged by a corporation controlling a public highway, stockholders are not the only persons whose rights and interests are to be considered. The rights of the public are not to be ignored. It is alleged here that the rates prescribed are unreasonable and unjust to the company and its stockholders. But that involves an inquiry as to what is reasonable and just for the public***The public cannot properly be subjected to unreasonable rates in order simply that stockholders may earn dividends. If a corporation cannot maintain such a highway and earn dividends for stockholders, it is a misfortune for it and them which the Constitution does not require to be remedied by imposing unjust burdens upon the public. So that the right of the public to use the defendant’s turnpike upon payment of such tolls as in view of the nature and value of the service rendered by the company are reasonable, is an element in the general inquiry whether the rates established by law are just and reasonable.” See, also Smith v. Ames, 169 U.S. 466, 544, 18 Sup. Ct. 418, 42 L. Ed. 819. In using the expression “value of the service rendered,” we must understand that the word “value” means the value to the person to whom the service is rendered. [At 119.]

Applying those general principles, the Court upheld questions asked the defendant by the plaintiff, which were as follows:

When you receive the service of water in a season of scarcity do you make any profit of that water? What is the service of water worth to the farmer? What would you consider to be a fair price for water service under the Salt River Valley Canal during the last year? During the past year were there any assessments on those 109 shares?” [reference being made to shares in the Tempe Canal Company, a company shown to be similar to the defendant company and operating in the same valley under like conditions.] What was the total assessment levied upon the 109 shares in the Tempe Canal for the fiscal year last year?” [At 119]

The reasons the Court gave for upholding these questions were:

Applying the law as we have stated it, it is readily seen that the first three questions quoted, tend to elicit information which it was proper for the court to consider. Answer to the other two, as is shown by an examination of the questions and answers preliminary to them, should tend to disclose the expense of operating and maintaining another canal serving water under similar contusions in the same valley and thus to throw some light upon what are appellant’s necessary questions. [At 119.]

Brunswick & T Waster Dist. v Maine Water Co., 59 A. 537 (Maine: 1904) (Calculating the value of a water company condemned by water district):

They [public utilities] are entitled to charge reasonable rates. “Reasonable” is a relative term, and what is reasonable depends upon many varying circumstances. An equivalent to the prevailing rate of interest might be a reasonable return, and it might not. It might be too high or it might be too low. It might be reasonable, owning to peculiar hazards or difficulties in one place to receive greater returns there than it would in another upon the same investment. Then, their reasonableness relates to both the company and to the customer. Rates must be reasonable as to both, and if they cannot be to both, they must be to the customer. That the amount of investment does not control either way is decided in San Diego Land & Town Company v. Jasper, 189 U.S. 439, 23 Sup. Ct. 571, 47 L. Ed. 892, and Stanislaus County v. Jan Joaquin, Etc., Co., 192 U.S. 201, 24 Sup. Ct. 241, 48 L. Ed. 406. In the former case the court said that the rule that the company is entitled to a fair return upon the reasonable value of the property at the time it is being used for the public, “Is decided as against the contention that you are to take the actual cost of the plant, annual depreciation, etc., and to allow a fair profit on that footing over and above expenses.” And in the latter the court said, “To take that amount actually invested into ‘estimation’ does not mean necessarily that such amount is to control the decision of the question of rates.” So that, while it is strictly true that the company is entitled to no more than a reasonable return upon its necessary investment, which is embodied in the structure and its natural increment, if any, that goes but a little way towards the solution of the problem, owing to the difficulty of saying just what is reasonable in a given case. That must, for the most part, be left to the good judgment of the tribunal which passes upon each particular case. [At 540-41.]

Please remember that these legal opinions were written based on the facts of a given city at a certain time. The laws referenced in any opinion may have changed or may not be applicable to your city or circumstances.

Always consult with your city attorney or an MTAS consultant before taking any action based on information contained in this database.