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HomeMy WebLinkAboutA001 - Legal Opinion No. 33 SUBJECT: Municipal electric utility - rate policy - application of surplus revenues to general government purposes . REQUESTED BY: Mayor and City Council DATE : January 38 , 1977 QUESTIONS : (a) May the City Council law- fully enact an electric rate structure featuring a "conser- vation incentive" or "demand disincentive" of . 2G per Kwh above the first 50 Kwh, or some similar rate exaction, to discourage nonessential electri- cal energy consumption? (b) If the "conservation incen- tive" or "demand disincentive" results in or contributes to an accumulation of surplus funds , may such funds be transferred to the C i ty general fund? ANSWERS : (a) Yes (b) Yes ANALYSIS A. With regard to the first question, there is very little statutory law to trammel the free exercise of the City Council 's reasonable discretion. The municipal utility is not subject to the rate regulatory powers of the Iowa Commerce Commission. The only provision on municipal utility rates to be found in the Code of Iowa is section 388 .6 which in its entirety provides only that: "A City utility or a combined utility system may not provide use or service at a discriminatory rate , except to the City or its agencies as provided in section 384 . 91 . " -2- The question becomes , therefore, whether the conserva- tion incentive or demand disincentive is a "discriminatory rate" within the meaning of section 388 .6 . That section became effective on July 1, 1972 , and there has not, as yet, been any Iowa case to adjudicate its meaning . Generally, however, courts of other stater have held that laws of this type are intended to prevent the conferral of unfair advan- tage or unwarranted disadvantage on arbitrarily selected users or a class of users . (See : 12 McQuillin Mun Corp (3rd ed. ) ss 34 .97) If the rate classification is rationally related to furtherance of a legitimate and valid objective of utility management and operates uniformly on all persons within the respective classifications , it will not be held to be an unlawful discrimination. (See : Owens v. City of Beresford, S .D. (S .D. 1972) 201 NW2d 890; _12 McQuillan Mun Corp (3rd ed. ) 34 .101) • a Certainly, in a time when the utilities capacity is diminishing relative to demand,, a policy of husbanding that capacity to provide needed energy by a rate structure in- corporating a feature reasonably calculated to discourage '' nonessential consumption will be recognized as a valid and proper utility management objective . I will cite, as but one example coming readily to hand, the August 8, 1974 decision of the Public Service Commission of Wisconsin on the Application of Madison Gas and Electric Company for Authority to Increase Its Electric and Gas Rate. In the Madison Gas and Electric case , the Commission recognized four basic principles for rate setting: "l . Rates should promote an efficient allocation of resources , thus dis_- couraging wasteful use of energy 2 . Rates should not be discriminatory . 3 . Rates should lead to stable revenues . 4 . Rates should reflect a sense of historical continuity. " The Commission characterized the case in this manner: "The widely prevailing practice among electric utilities today concerning rate structures calls for recovery of customer ' costs - i .e . costs which do not vary with use --- in the first. one or two consump- tion blocks . Often a portion of the customer costs are collected through a fixed charge . The third and following blocks generally exhibit a declining price level with increased sales in order to reflect the economies of scale which result frnm increased output. This typical profile! of a rate schedule will be referred to herein as a "declining block rate structure" . This order covers the first comprehensive hearing testing the appropriateness of these traditional rate designs in view of new and differ- ent conditions faced. by the public utility industry . " "A central issue raised in this case was the appropriateness of the declining block rate structure. Alternatives to the declining block structure discussed are ' flat rates ' and 'inverted rates ' . A ' flat rate ' structure consists of a fixed charge plus a rate per kilowatt-hour applied to all consumption. The ' inverted rate ' structure imposes higher energy charges for greater levels of consumption. " -•4- The Wisconsin Commission went on to adopt a modified "inverted rate" structure by exacting a charge of . 7�/Kwh above the first 1, 000 Kwh, a :structure highly analogous to what is proposed by the Mayor for purposes of soliciting this opinion. The Wisconsin decision, with its majority, concurring and dissenting opinion is very interesting and informative reading, and a copy is available in my office to anyone who is interested. B . The answer to the second question: "Can an accumulation of surplus funds or 'profits ' of the municipal electrical utility be transferred to the general fund?" , is provided with a clear, affirmative answer by the express provision of section 384 . 89 of the Code of Iowa 1975 , which states : "Section 384 . 89 Transfer of Surplus The governing body of a city utility, combined utility system, city enterprise, or combined city enterprise which has on hand surplus funds , after making all deposits into all funds required by the terms , covenants , conditions , and pro- visions of outstanding revenue bonds , pledge orders , and other obligations which are payable from the revenues of the city utility , combined utility system, city enterprise , or combined city enterprise and after complying with all of the re- quirements , terms , covenants , conditions and provisions of the proceedings and resolutions pursuant to which revenue bonds , pledge orders , and other obliga- tions are issued, may transfer such sur- plus funds to any other fund of the city in accordance with any rules promulgated by the city finance committee created in section 384 . 13 if: the transfer is also approved by the city council, pro- vided that no transfer may be made if it conflicts with any of the require-1. ments , terms , covenants , conditions or provisions of any resolution authorizing the issuance of revenue bonds, pledge orders , or other obligations which are payable from the revenues of the city utility, combined utility system, city enterprise, or combined city enterprise which are then outstanding. As I hope is evident front reading the section quoted above , there is no "surplus" or "profit" until the commit- ments made under bond covenants are honored, but thereafter, a transfer may be made , subject to such rules as the state "City Finance Committee" may have adopted or may hereafter adopt, if any . CONCLUSION The City Council has broad discretion in setting utility rates reasonably calculated to serve a number of legitimate objectives . A modified inverted rate structure formed by placing a . 2�/Kwh charge on consumption above a certain level as a conservation incentive or demand dis- incentive would be a proper exercise of that discretion. Surplus revenues or utility profits resulting from that . policy could be transferred to the general fund and such transfer may be styled, as the Mayor has , as a payment in lieu of taxes . A rate structure providing a conservation ;, incentive and a financially profitable and publicly bene- ficial municipal electric utility do not appear to be ` mutually exclusive alternatives .. Respectfully submitted, John R. Klaus City Attorney: s..............