Knowledgebase-Outside Utility Rate Discrimination


Information Product

Title:Outside Utility Rate Discrimination
Summary:MTAS was asked several questions related to charging outside utility customers higher rates than inside utility customers.
Original Author:Hemsley, Sid
Co-Author:
Product Create Date:05/19/2009
Last Reviewed on::12/05/2016
Subject:Utilities--Rates and charges; Utilities--Rates and charges--Tennessee
Type:Legal Opinion
Legal Opinion: utility rate discrimination public.doc

Reference Documents:

Text of Document: MEMORANDUM



FROM: Sid Hemsley, Senior Law Consultant

DATE: May 19, 2009

RE: Outside Utility Rate Discrimination





The Question of Outside Utility Rate Discrimination

The question of whether and how municipalities must justify their outside utility rates has arisen in many cases in the United States. Several general legal conclusions can be drawn from the cases involving outside utility rate discrimination:

1. The heavy weight of authority is that the person challenging the utility rates bears the burden of proof to show that the rates are unreasonable, and such a showing is difficult to make.

2. The courts have generally recognized a difference between reasonable rates and rates that are unreasonably discriminatory (or are discriminatorily unreasonable, depending on the particular court ' s language), and have generally found even large outside rate differentials reasonable.

3. Generally, the difference in the cost of providing outside service is the standard that supports outside rate discrimination. However, almost all the courts in the United States that have addressed claims of outside rate discrimination, have been liberal in upholding what utilities assert to reflect costs, and have even allowed costs to include a reasonable profit.

Tennessee Statutory and Case Law On Utility Rate Discrimination

A fundamental principle governing the provision of all utilities in Tennessee is that they must be provided without discrimination to all applicants in the same class, and that class distinctions must generally 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); Crumley v. Watauga Water Co., 99 Tenn. 419 (1897); City of Parsons v. Perryville Utility District, 594 S.W.2d 401 (Tenn. App. 1979)] In fact, the courts have said that such is the law even where it is not stated in the utility ' s enabling or governing legislation.

Tennessee Code Annotated, ' 7-34-115(a), a part of the Revenue Bond Law, but which apparently applies to all utilities under whatever statute they are established and operated, requires that:

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. [Emphasis is mine.]

The overwhelming weight of authority in the U.S. is that while utilities cannot engage in rate discrimination, they can charge differential rates, provided the difference is reasonable. [4 ALR2d 595] Under Parsons v. Perryville Utility District, 594 S.W.2d 401 (1980), that weight of authority includes Tennessee. That case points to the statutory rate-making powers of municipal water and sewer systems: Tennessee Code Annotated, ' ' 6-604 [now 7-51-401], 6-1408 through 6-1439 [now 7-35-401 et seq.], especially 6-1421 [now 7-35-414], and cites with approval 945 C.J.S. Waters, ' 297, which says, among other things, that:

Where water furnished is all supplied from the same sources, and is supplied to several contiguous communities embraced in one general district, with no unreasonable extensions to serve lean territory or other elements creating material differences in cost, a uniform rate for the entire territory is indicated and ordinarily justified; but it is not essential that all rates throughout a large territory served from a single water system be the same, and rates in each part of such territory may be fixed at a level which is fair and reasonable in view of the existing conditions.... [My emphasis]

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]
The Court's emphasized language supports the proposition that where it costs more to serve a certain class of customers it is rate discrimination not to charge them that cost. Indeed, in City of Parsons v. Perryville Utility District, quoted immediately above, it was held that the City of Parsons could not enter into a 45 year contract with the Perryville Utility District that prohibited the city from raising its water rates to recover increased capitalization costs.

Tennessee Code Annotated, ' 7-51-401, authorizes various utilities to extend water and sewer service outside their municipal boundaries, and declares that, "Any such county, utility district, municipality or public utility agency shall establish proper charges for the services so rendered so that any such outside service is self-supporting." [Emphasis is mine]

Tennessee Code Annotated, ' 7-35-401, provides that a city acquiring and operating waterworks and sewer systems under that statute, "has the power, and it is its duty, by ordinance, to establish and maintain just and equitable rates and charges for the use of and the service rendered by such waterworks and/or sewer system, to be paid by the beneficiary of the service." [Emphasis is mine]

The right to charge differential rates under the above guidelines applies to both inside and outside rates.

Following City of Parsons v. Perryville Utility District, there have been few cases in Tennessee in which the courts have been called upon to determine whether charges for outside utility services reflect rate discrimination, and both those cases involve questions similar to City of Parsons, above. In Maury County Board of Public Utilities v. City of Columbia, 854 S.W.2d 890 (Ct. App. 1993), the City of Columbia Water System provided water at three rates: urban (inside the city), suburban (outside the city), and private fire protection. Under contracts between the Columbia Water System and Maury County Board of Public Utilities and the cities of Mount Pleasant and Spring Hill, the former provided water to the latter for 40 years at the "prevailing rate" for "suburban" water service. For 20 years, rate changes were made, but the uniform rate was applied to all "suburban customers." After experiencing an operating loss the City of Columbia itself changed the rate classifications. There was a classification and a rate for urban area customers outside the city limits, and a suburban area classification carrying a substantially higher rate. However, the only customers in that latter classification were Maury County Board of Public Utilities, and the cities of Mount Pleasant and Spring Hill.

In striking down the City of Columbia's changes in the contract, the Court declared that:

In this case, the plaintiff's contracts with the City of Columbia do not prevent the City from raising water rates, as it has already done twice in the last decade. The contractual provisions merely ensure that the plaintiffs ' increases will be at the 'prevailing rate ' for out-of-city users. Those provisions are enforceable. The law clothes the Board with the power to execute such contracts, and their terms do not prohibit rate increases, but only prevents the city from varying the terms of the contract to change rates other than in the manner provided in the contracts. [At 892]

The Court also cited for support two other Tennessee cases involving changes to utility contracts on the part of the utility system. In Bybees Branch Water Association v. Town of McMinnville, 333 S.W.2d 815 (1960), the City of McMinnville contracted with Bybees and others to furnish water to them at the same rate it was furnishing users of water within the limits of the city. A new McMinnville Board of Mayor and Aldermen raised their water rates 50% more than the contracted rate. The Court overturned that increase. In Batson v. Pleasant View Utility District, 592 S.W.2d 578 (Tenn. App. 1979), the Court struck down a $500 tap fee imposed by the utility district on each residence in a development, when the contract between the utility district and the developer provided for the developer's costs and did not include a tap fee. The Court concluded that:

By acting in its proprietary capacity, the defendant [utility district] has obligated itself by contract to provide "tapping on" without charge. This is not in abrogation of its statutory authority to fix or revise rates or charges in its legislative or governmental capacity.

The addition of a "tapping on" charge constitutes a unilateral modification of the contracts. Modification requires the mutual assent and meeting of the minds required to contract. [At 582]

The unreported case of Turnbull Utility District v. White Bluff Utility District, 1994 WL 462268 (Tenn. Ct. App.), involved the interpretation of the phrase "increased capitalization" in a provision of the contract under which Turnbull agreed to sell water to White Bluff, and which provided that:

The costs specified in the preceding sentence is [sic] hereby defied as the sum of the following elements of operating expense of the Turnbulll Utility District as listed in the District's annual audit, excluding increased capitalization of the Turnbull District System:
A. Source of supply expenses,
B. Power and pumping expenses,
C. Purification expenses,
D. Transmission and distribution expenses. [At 3]

There was disagreement between Turnbull and White Bluff over what was included in the phrase "increased capitalization.
" In the trial court, Turnbull ' s expert argued that it could have two meanings: (1) A ... capitalization of costs that would otherwise be expenses, or (2) ".... the total debt and equity of a utility." White Bluff's expert agreed to those definitions, and added that " .... capitalization of an asset or to the sources of capital used to finance investments in an enterprise." [At 3] The Court declared that Black' s Law Dictionary 210 (6th ed. 1990), agreed with those definitions of "capitalization," but declared that White Bluff's expert added a third definition: "as capitalization of a stream of income too obtain the value of a firm." That definition, said the Court, also agreed with the definition found in Blacks Law Dictionary 210 (6th ed.1990).

The Court agreed with Turnbull that capitalization in the context of its water supply contract with White Bluff related to the expense side of the contract: "The phrase 'increased capitalization ' was placed where they [the drafters of the contract] intended it to be placed, that is, modifying the expense step of the rate calculation." [At 4] The Court also pointed out that the chancellor had agreed with Turnbull ' s argument, and that "This finding allows a contract to be read without any violation of Tennessee Code Annotated, section 7-82-403, which requires a utility district to charge, and to change, rates sufficient to pay the list of costs listed therein" :

(1) Provide for all expenses of operation and maintenance of the system or systems, including reserves therefor; and
(2) Pay when due all bonds and interest thereon for the payment of which such revenues are or shall have been pledged, charged or otherwise encumbered, including reserves therefor. [At 4]

Citing City of Parsons v. Perryville Utility District and other cases cited above, the Court reaffirmed the proposition that the courts would not enforce a provision in a utility supply contract under which the supplying utility could not raise rates to recover capital costs.
Those cases appear to reflect the sum and substance of differential utility rates in Tennessee. There are none that I can find where the Tennessee courts have taken up a case involving a charge of outside utility rate discrimination.

Case Law From Other Jurisdictions On Outside Rate Differentials

A comprehensive annotation on inside and outside utility rate differentials is found in 4 A.L.R. 2d 595, entitled Discrimination between property within and that outside municipality or other governmental district as to public service or utility rates. (Originally published in 1949-but updated to within a week) There are no Tennessee cases reflected in that annotation, but the overwhelming weight of authority in that annotation is that outside utility rate "discrimination" is allowed where it is reasonable, and that what is reasonable is generally based on the cost of providing the outside utility service at issue. But even significant outside rate differentials have been upheld as reasonable because what constitutes "reasonable rates," and "costs" have been given generous readings by the courts. In addition, with few exceptions, the burden of showing that an outside utility rate is unreasonable falls on the person making that allegation; that has proved a heavy burden.

Recent cases in other jurisdictions have tackled the question of what constitutes rate reasonable utility rate discrimination.

The case of Water Works Board of the City of Birmingham v. Barnes, 448 So.2d 296 (Ala. 1984), reflects the most detailed account of how cost fixing was done by a utility. There the water board adopted a three zone water rate schedule, which was the product of a cost of services study done for the board by Arthur Young & Company consulting company. The board informed Arthur Young & Company that several assumptions approved by the American Water Works Association (AWWA) should underlie the study:

1. A zone rate should represent an average rate for all customers in the zone.

2. The allocation of costs within the zones should be based upon the relationships of average day, maximum day and maximum hour demand patterns. The allocation of costs under this assumption calls for the use of the base-extra capacity rate-making method.

3. Fire protection costs should be determined for each zone, and the rate schedules should be structured to recover such costs.

Two other assumptions pertained exclusively to the Birmingham system. I have not included those.

Arthur Young & Company used a five step process to prepare the cost of service study for the board.

First: Determination of the total amount of revenue required to operate, maintain and develop the water system (done on a cash basis).

Second: Allocation of revenue requirements among the zones. The allocation was generally made according to water consumption as to operation and maintenance, except that all costs attributable to a certain pumping station were allocated to Zone 1, according to the assumption concerning the distribution of that supply. Capital costs were allocated to zones according to the following chart prepared by the utility board:

Allocation of Capital Costs to Zones

1. Existing Debt Service-Net Book Value

2. Proposed Debt Service- Net Book Value

3. Repair, Replacement, and Improvement-Water Consumption

4. Debt Reserve-Water Consumption

5. Capital Outlay-Water Consumption


[It is said at this point in the case that:

The Allocation of debt service according to net book value was opposed by the plaintiff. As a result of such opposition, Arthur Young & Co. considered the strict allocation of debt service to debt-bearing assets, having previously identified the debt-free assets in the system. According to calculations done by Arthur Young, allocation of debt-service to Zone 3 was the same for both methods, namely 22%. In any event there was testimony at the trial that though the allocation of debt service might be considered prejudicial to Zone 3, any inequity was offset by the allocation of capital outlay on the basis of water consumption. Zone 3 was charged with $126,000.00 of capital outlay, when allegedly, $2,000, 000.00 was for Zone 3.] [At 298]

Third: Allocation of zone costs to the following cost functions:

1. Base Cost

2. Excess Capacity Cost

Sub-divided into:

a) maximum day cost

b) maximum hour cost

3. Direct Fire Protection.

The Allocation according to these functions was intended to pay the expense of meeting extra demand on those customers responsible for demand in excess of the average.

Having identified the applicable cost functions, said the Court, completion of the third step required the allocation of operation and maintenance costs and capital costs to the function. This process involved the development of zone peaking factors (ratio of peak demand over base demand), which were prepared for Arthur Young by another engineering firm.

Fourth and Fifth: Allocation of zone costs to customer classes and the designing of rates for water use blocks. (These processes were contested by the plaintiffs, according to the Court).

After the rates were imposed under the three-zone schedule, the plaintiff ' s sued. Initially two issues were raised: the lawfulness and reasonableness of the water rate schedule "as it related to both water and sold by meter measurements in Zone 3, and the increase in the hydrant rental charge for fire protection in Zone 2." The trial court held for the plaintiffs on both issues, making these findings of fact:

1. That the boundary between Zones 1 and 2 were established on the basis of a 1951 agreement between the six cities in Zone 1 and the Board;

2. That the boundary between Zones 2 and 3 was, at least partially based on political boundaries and not on physical differences between the areas;

3. The water system is "one unified complex integrated system" and that "it is difficult, if not impossible, to determine the actual cost to the customers in the various zones;"

4. The areas annexed by cities within Zone 1 would automatically be accorded Zone 1 rates, without reference to cost of service.

The trial court decided that the utility board must charge uniform rates "for all customers in the same class (e.g., residential, industrial, commercial)."

On appeal, the utility board argued that its creation of the three-zone rate schedule was a legislative act that should have been presumed valid. The Alabama Supreme Court agreed. It also declared that the evidence supporting the different costs of service in the three zones was a rational basis for charging the differential utility rates in the three zones, and noted that "we are convinced that trial judge, based on an erroneous view of the law, substituted its judgment regarding the schedule for that of the Board, which evidently was not evaluated with reference to the finding of the cost of service study performed by Arthur Young & Co." [At 299] The Court said this about utility rate-making in this case:

This court has indicated that "physical differences" are required to justify separate classifications for rate-making purposes. Id.; City of Montgomery v. Green, 187 Ala. At 198, 65 So. at 783 (second appeal). The trial court opined that City of Montgomery v. Greene "denotes the definition of physical differences wherein the Court clearly provided that customers on the same main could not be charged different rates.... "We disagree. It is clear from the opinion for the first appeal that even if two groups of purchasers are supplied from the same main, physical differences with respect to the two sides of a political line may constitute a sufficient basis for classifying the two groups differently in setting rates for service. 180 Ala. At 329-30, 60 So. At 902. [At 300]

Four physical differences supported the utility board ' s setting of a central and a rural rate in 1973, and its decision to set up an intermediate zone as part of a three-zone rate schedule to replace the earlier central-rural rate scheme:

1. Population density

2. Distance from filter plant

3. Vintage/Age of system

4. Peaking factor

"In addition," said the Court:

the amount of water required for fighting fires and the density of hydrants differed for each zone. Moreover, uncontradicted testimony at trial indicated that the average pattern of land use was different in the three zones. It was the opinion of the Board that these factors were highly determinative of the cost of service for customers. That opinion was substantially verified by the cost of service study prepared by Arthur Young & Co. [At 300] [Court ' s emphasis.]

The Court, citing a Connecticut case, did issue a caution with respect to setting differential outside utility rates:

In a case involving a large municipality and smaller surrounding towns, a higher rate may be prescribed for consumers in the smaller communities, without unlawful discrimination, provided it is not unreasonably high in comparison with the city rate, considering the respective costs of service and other conditions affecting rates. Such a differentiation, however, logically involves an apportionment of values, revenues and expenses. [Citations omitted by court.] The difficulties attendant upon making approximately accurate allocations and fixing fair or satisfactory zone or other differing rates are manifest, and are not to be undertaken unless there are such differences in circumstances and conditions between different parts of the territory serviced as to justify departure from uniform rates. [At 300]

In Mitchell v. City of Wichita, 12 P.3d 402 (Kansas 2000), the Kansas Supreme Court, in a lengthy analysis of outside utility rate cases, took great pains to outline what is and what is not a discriminatory utility charge, in upholding an outside rate differential of 55% against an allegation that it reflected a discriminatory rate.

The Court advanced several reasons for that decision:

First, two pertinent Kansas statutes provided that:
No person, firm, corporation, or association, nor any city department, shall be allowed free use of water, nor shall there be discrimination among water users of like classes as to rates, and rebates in rates shall never be allowed to any person, firm or corporation or city department except as an inducement to prompt payment of water rates.

and that:

Said board of commissioners [of a city] shall fix such rates for water furnished to consumers as will secure an income sufficient to pay all salaries and wages of all officers and employees in such department; to cover all miscellaneous expenses; to pay all interest charges upon all indebtedness of the city created for the purpose of purchasing, improving or extending the waterworks, and to provide a sinking fund of not less than two percent per annum upon such gross indebtedness for the purpose of paying off such indebtedness at maturity; to cover the cost of all repairs, renewals, betterments and extensions of the waterworks, and all material uses; to cover the depreciation of the plant by a use and by improvement in the arts; to repair all losses of the water works caused by accident of every kind and to recoup the city for loss of taxes due to ownership. [At 407]

The City, said the Court, "has the statutory authority to set rates for its water and sewer service. There is no statutory impediment to charging a higher rate for those customers who live outside the city limits." [At 407]

Second, "rate-making," said the Court:

Is a legislative or administrative, not a judicial, function. A rate fixed by the proper administrative authority, while it may be annulled if in violation of legal rights, is not subject to adjustment or correction by the court as a reviewing or supervisory body .... Discrimination, to be unlawful must be unjust and unreasonable. It must operate to the unjust advantage of another... However, absolute uniformity is impossible of attainment....Classification within just and reasonable limits, is proper and permissible. The presumption is in favor of the rate and rule established by the rate- making authority... [At 407-08] [Citations omitted by me.]

Third,

The ... issue is whether or not the amount of the surcharge is unreasonable....The amount must still be reasonable in the sense that it is not excessive or confiscatory. The Court notes that in the Usher v. City of Pittsburgh case the Supreme Court upheld a 100 percent surcharge to nonresident customers as opposed to the 55% surcharge we have in this case. So there is nothing, per se, unreasonable about 55 percent. How the city determines what this assessment should be is a legislative function that the court can ' t interfere with, unless the case clearly presents a flagrant attack on the rights of property. In deciding whether the surcharge assessed by the city is appropriate, mathematical exactness is not required; reasonableness is the test. It is a generally recognized rule that the water rates set by a municipal corporation are presumed to be valid and reasonable unless the contrary has been established. The burden is on the plaintiffs to show that the rates are not reasonable.... [At 409-10]

Fourth,

The City offered reasons for charging a higher rate. First, the City indicated that it uses the surcharge as a means of encouraging annexation into the city. Second, the City uses the surcharge to make up lost taxes it would have realized had the water plant been privately owned. [See K.S.A. 13-2405 (allowing citizens to set rates so that they can recoup lost tax dollars if the waterworks is
publically owned). See also Town of Terrell Hills, 318 S.W.2d at 88 (considering the lost taxes due to public ownership of the water department as a reason for allowing a 30% surcharge for customers living outside the city limits.).

Even though the district court found that surcharge was justifiable in part on the basis of the lost ad valorem taxes, a fact that would not justify placing the entire ad valorem loss on those living outside the city, each of the reasons offered supplies us with a rational basis by which to uphold the surcharge. See Bodine, 263 Kan. At 426, 1949 P.2d 1104 (affirming district court which had upheld water rates and held that plaintiff had failed to show that water rates were unreasonable or that they were "so excessive as to yield a large profit.") See also Barr, 151 Conn. At 61-62, 192 A2d 872 (holding that plaintiff had failed to show that rates were unreasonable where city charged twice the rate for those who lived outside the city limits); West Capital Associates, 110 Md.App at 453, 677 A.2d 655 (holding that appellant had failed to show that rates were unreasonable even though they were twice that of residential customers who lived within city limits); Bleick, 2169 Neb. At 577, 365 N.W.2d 405 (holding that water service rates which were two times greater than outside the city limits and sewer rates which were 1.5 times greater outside the city limits were enforceable.; and Town of Terrell Hills, 318 S.W.2d at 88-89 (upholding rate differential of 30%). [At 410]

The reasons justifying the outside rate differentials in the above cases are not contained in the Mitchell v. City of Wichita Court ' s analysis of those cases, but a reading of them supplies those reasons as follows:

- Town of Terrell Hills v.City of San Antonio, 318 S.W.2d 85 (Ct. Civil App. Texas 1958) (30% higher outside rate):

The reasons justifying the higher outside rate were that: (1) Cost of meter reading outside city is substantially higher; (2) stand-by water demand required outside city is substantially greater than inside the city; (3) rates outside the city should be based on 7% return on the fair valuation of that portion of the plant value allotted to water users outside the city. Rates for residents were based upon a 7% return on the fair valuation of that portion of the plant value allocated to water users inside the city, but the city waived 3% of that figure. (4) In formulating rates outside the city, a substantial charge was made for fire protection service through fire hydrants and maintaining sufficient pressure for such service. No similar charge made inside the
city. The Court added that, "If we disregard the other factors entirely, the six percent differential based on actual additional cost of meter reading and fire protection service would justify the thirty percent differential." [At 87]

Other reasons for the higher outside rate, said the Court, were that:

Even in a case, such as this, where the utility is supported by revenues instead of taxes, it is the city that bears all the burdens and responsibilities of management [Citation omitted by me.] A city utility which furnishes water to both its own residents and non- residents at the same rates, indirectly imposes burden upon its residents which non-residents in no way share. City areas which have utility connections have higher valuations which do not have the Utility. The city levies and collects its taxes based upon this enhanced value. Non-resident areas, however, not being taxable at all, receive the same benefits of enhanced value from utility connections but bear no part of this additional burden. [Citation omitted by me.] Assuming a situation where water rates are exactly


equal for residents and non-residents, the mere fact that water is furnished would impose a tax burden upon enhanced valuations of residents which non-residents would entirely escape. [At 88]

- Barr v. First Taxing District of the City of Norwalk, 192 A.2d 872 (Supreme Court of Errors of Conn. 1963) (outside rate twice the inside rate):

The growth of the outer-district customers has necessitated considerable expansion of the defendant ' s facilities. None of this expansion was required for inner district demand. Included in the additions to the system since 1946 were a million-dollar reservoir and dam, a high-pressure system, booster pumps, distribution mains, a well development, and two one-million-gallon stand pipes. All of these expansion projects have been financed by general obligation bonds of the defendants which were authorized by special acts of the legislature and for which taxpayers and all of the property in the first taxing district are secondarily liable.... [At 874]

.... [T]he customers in the inner district are in what constitutes a compact area, where the customer density is much greater than in the outer district. The latter is spread over a much larger terrain, and while there are more customers in the outer district, they are located much further apart than those in the inner district. The outer district is hilly and rocky as compared to the inner district. The result is that the increased costs of installation, the additional lengths of mains between customer, and the need of pumping facilities make it more expensive to provide and maintain the system and the service in the outer district.... [At 874]

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 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 their rates are excessive and their action illegal and arbitrary. [At 875] [Citation omitted by me.]

- West Capital Associates Limited Partnership v. City of Annapolis, 677 A.2d 655 (Md. App. 1996) (outside rate twice the inside rate):

The City code provided that outside water service charges "shall be twice that charged to users within the city," but also permitted the city by ordinance, to approve an agreement for a rate equal to the rate charged city residents if the outside user agreed "to make annual payments to the city in amounts equivalent to city real property taxes which would be imposed if the property were in the city." [At 657] (Sewer rates were to be 122% of water rates for both inside and outside users.) The plaintiff, and outside water and sewer user, entered into a contract with the city to pay the following charges: (1) The same rate for water and sewer service as paid by inside users; (2) connection charges customarily charged by the city; (3) Capital facility charges and assessment customarily charged by the city; and (4) An annual A fee in an amount equal to the real estate taxes that the plaintiff would be liable to pay to the city if the property was annexed by the city. The plaintiff subsequently balked at paying the water and sewer rates, claiming that they were discriminatory and unconstitutional. The court reject his claim, declaring that they "didn't have even the slightest merit." [At 659]

Rates are presumed to be reasonable, said the court, and:

Appellant offered no evidence below, beyond the mere fact that the residential rates are lower than the rate contractually fixed for it, to justify a charge that its rate was unreasonable or discriminatory. No evidence was produced to show that the plant and facilities used to provide the water and sewer service are not, in some measure, supported by the general revenues of the city. If, indeed, the ability to provide the service is funded to any extent by such revenues B even to the extent that the municipally owned plant and facilities themselves are not subject to municipal taxation B it would certainly be reasonable for the City to impose, as a surcharge on non-residents, an additional amount in lieu of the taxes that would be paid if the property were subject to the City property tax. Otherwise, the City residents would, in effect, be subsidizing the non-resident user. [At 660]

- Bleick v. City of Papillon, 365 N.W.2d 405 (Neb. 1985) (outside water rates twice inside water rates; outside sewer rates 1.5 times inside rates):

A municipally owned waterworks system supplying water without its corporate limits may, generally, charge more for that service than is charged users of the water service who reside within the corporate limits.... The fact that residents of the municipality have borne the cost of establishing or financing the system will justify charging a higher rate to nonresidents. [At 407]

The rates fixed by the City are uniform as to residents and uniform as to nonresidents. The City has no assurance that the S.I.D. will continue to purchase service in the future, and whatever expense or improvement that may be necessary in the facilities of the City will be solely the responsibility of the City. [At 408]

The recent case of Keevan v. City of Highland, 689 N.E.2d 658 (Ill. App. 1998), also discussed the test for determining whether outside rates are reasonable, and what evidence of costs the utility supplier could use in setting rates. In that case the outside rate was 75% higher than the inside rate, which was based on a financial plan and rate study done by an engineering firm. The trial court upheld the rate differential and Keevan appealed, on the ground that the trial court had used the wrong factors to determine whether the differential water rates were reasonable. The Court of Appeals upheld the trial court, reasoning that:

Keevan had the burden of proving by a preponderance of the evidence that Highland ' s rates were unreasonably discriminatory... As stated above, the question of whether unreasonable discrimination exists is one of the facts to be based on the evidence presented. Therefore, the trial court was allowed to accept the testimony of Highland ' s expert and exhibits that suggested there are certain other costs associated with the delivery of water to nonresidents as relevant factors supporting the difference in the rates. These costs include lost revenue to Highland through the loss of State shared revenue and burdens created by the out-of-city water lines ' capacity, maintenance and liability issues. [At 600-602]

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.