The following opinion is presented on-line for informational use only and does not replace the official version. (Mich Dept of Attorney General Web Site - www.ag.state.mi.us)


STATE OF MICHIGAN

FRANK J. KELLEY, ATTORNEY GENERAL

Opinion No. 5167

March 21, 1977

MUNICIPALLY OWNED UTILITIES:

Charge for late payment or discount for prompt payment.

A municipally owned public utility may impose a charge for late payment or grant a discount for prompt payment if the amount involved is reasonably related to the actual costs occasioned by late customer payments.

Honorable Daniel S. Cooper

State Senator

The State Senate

Lansing, Michigan 48933

You have requested my opinion as to whether, in making charges to its customers for utility service a municipality may provide for a discount for prompt payment or impose a charge for late payment. Both the prompt payment discount and the late payment charge are intended to encourage prompt utility bill payments.

A municipality may exercise powers granted to it by the express terms of a statute, such as are fairly implied or incident to those granted, or such as are essential to the declared objects of the municipal corporation. Attorney General, ex rel Bissell v Burrell, 31 Mich 25, 9 NW 849 (1875); Toebe v City of Munising, 282 Mich 1; 275 NW 744 (1937); City of Detroit v Public Utilities Commission, 288 Mich 267; 286 NW 368 (1939); Home Owner's Loan Corp 292 Mich 511; 290 NW 88 (1940). Therefore, whether a municipality may grant a discount or impose late payment charges depends upon whether authority is provided in statutes governing municipal regulation of municipally owned utilities.

The relevant statutes which confer authority on municipalities to fix rates are: 1895 PA 215, ch 27, Sec. 6; MCLA 107.6; MSA 5.1900 (fourth class city lighting rates); 1895 PA 3, ch 12, Sec. 6; MCLA 72.6; MSA 5.1425 (village lighting rates); and 1931 PA 316, Sec. 12; MCLA 123.212; MSA 5.2712 (city and village sewerage disposal rates); 1895 PA 3, ch 11, Sec. 6; MCLA 71.6; MSA 5.1414 (village water rates); 1895 PA 215, ch 26, MCLA 106.6; MSA 5.1889 (fourth class city water rates); and 1933 PA 94, Sec. 21, as amended by 1974 PA 27; MCLA 141.121; MSA 5.2751 (authorizes any county, city, village and township to set rates for utility services if revenue bonds are issued).

In Andrews v City of South Haven, 187 Mich 294, 299 (1915), the Supreme Court, concerning the implied powers of a municipality in providing utility service, stated:

'The electric light plant which defendant owned and operated, although a municipal public utility, was a business concern or enterprise. In its operation and business management the city had the right and power to do those things naturally connected with and belonging to the runnings of such a business which a private corporation would have in the same connection . . . The power to engage in this municipal business activity for the public welfare is necessarily conferred in general terms. To go into details of administration and specify each particular thing which could or could not be done would be unwise and practically impossible. As to details and methods of conducting such authorized business, involving exercise of special knowledge and business judgment, there must be many implied powers.'

Therefore, the Court held that the city, in operating an electric plant for its citizens, had implied power to do electrical wiring on private premise and to furnish other accessories and fixtures essential and convenient in using electricity.

Similarly, methods of encouraging prompt payment of utility bills may reasonably be said to be an implied power of the utility business, whether privately or publicly owned.

Although not specifically provided for by statute, the universal test as to the legality of municipal utility rates as well as other public utility rates is whether the rate is 'just and reasonable.' City of Detroit v Public Utilities Commission, supra. Inherent in fixing 'just and equitable' or 'just and reasonable' rates is the need to establish customers rate classifications that are related to the cost of serving each class of customers. A rate structure which differentiates prompt paying customers from late paying customers of a privately owned public utility has been upheld as 'just and reasonable' in State ex rel Guste v Council of the City of New Orleans, 309 So 2d 290; 9 PUR 4th 353 (1975). The record there disclosed that elimination of late charges would require all ratepayers, including those who pay their bills promptly, to pay a higher utility rate in order to absorb the cost of collection. Furthermore, the Court noted, there was no substantial difference between the additional revenues collected as late payment charges and the added costs occasioned by the late payments.

The Iowa State Commerce Commission also ordered installation of a similar system of late charges to encourage prompt payment of utility bills in Joseph H. Delich v Iowa Electric Light & Power Co, 9 PUR 4th 335 (1975).

Until recently, privately owned public utilities which are subject to the jurisdiction of the Public Service Commission were able to impose late payment charges or grant prompt payment discounts. However, for policy reasons the Commission altered its billing practice rules to prohibit such charges. Administrative Code 1954, AACS 1974, R 460.2118.

Therefore, late payment changes reasonably related to the additional costs incurred by municipal utilities may be included in the rate structure of municipal utilities. And the burden is on the party attacking such a classification to show that it is illegal. City of Detroit v City of Highland Park, 326 Mich 78; 39 NW 2d 325 (1949).

The question also arises whether these late charges violate the usury laws of this state. 1966 PA 326, as amended by 1970 PA 227; MCLA 438.31; MSA 19.15(1) prohibits collection of interest above 5% per annum although the parties may agree in writing to a higher rate not to exceed 7% simple interest. If the late charges are considered as amounts paid by the customer to compensate the municipal utility for deferring the time when the obligation is to be paid, then those charges do constitute interest and are subject to the interest limitations in 1966 PA 326, supra. On the other hand, if the late charges are intended to compensate the municipal utility for the added administrative costs arising from the failure of customers to pay their bills on time, then these charges do not constitute interest. However, the revenues derived from these charges must reasonably approximate the additional costs occasioned by late payments. This was the position taken by the Iowa State Commerce Commission in its order in Joseph M. Delich v Iowa Electric Light & Power Co, 9 PUR 4th 335 (1975). See also State Mutual Rodded Fire Insurance Co of Michigan v Randall, 232 Mich 210; 205 NW 165 (1925).

I therefore conclude that a municipally owned utility may impose a charge for late payment or grant a discount for prompt payment if the amount involved is reasonably related to the actual costs occasioned by late customer payments.

Frank J. Kelley

Attorney General