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Opinion No. 5335

June 28, 1978


Separate classification of rates based on age and ability to pay


Classification based on age and ability to pay

The legislature may create a rate classification or it may authorize the Public Service Commission to adopt a rate classification based on age and ability to pay for utility ratepayers.

A rate classification based upon age and income does not offend the Constitution.

Honorable G. Hasper

State Representative

The Capitol

Lansing, Michigan

With specific reference to House Bill 5430 introduced in the 1977 session, which would create a utility rate concession based on age and ability to pay for gas, telephone and electric utility services, you ask the following question:

May the legislature lawfully create separate rate classification for utility ratepayers based on age and ability to pay or is such a rate classification a matter for initiation by the Michigan Public Service Commission?

House Bill 5430 in essence provides for a 50% reduction in utility rates upon application and showing to a gas, telephone or electric utility by ratepayers who:

1) are 65 years of age or older;

2) have annual income of $8,000.00 or less;

3) do not live with more than one person under 65 years of age.

In addition, the bill has a 90-day period within which the utility must file reduced rate schedules after the proposed amendment takes effect.

The Michigan Public Service Commission (hereinafter MPSC) is a creature of the legislature and as such has only those powers granted to it by statute. Sparta Foundry Co. v Michigan Public Utilities Commission, 275 Mich 562; 267 NW 736 (1936).

By 1939 PA 3, Sec. 6; MCLA 460.6; MSA 22.13(6) the MPSC has been charged with the 'power and jurisdiction to regulate all rates, fares, fees, charges, services, rules, conditions of services and all other matters pertaining to the formation, operation or direction of such public utilities.' This section expressly excludes municipal utilities from MPSC regulation.

Other relevant utility statutes in Michigan provide:

1) no discrimination for electric utility services (MCLA 460.557; MSA 22.157)

2) all charges for telephone service shall be just and reasonable except for concession service as provided therein for telephone company employees and pensioners (MCLA 484.103; MSA 22.1443)

3) no discrimination for telephone service (MCLA 484.104; MSA 22.1444)

4) no preferences for telephone service (MCLA 484.105; MSA 22.1445)

5) no preference or advantage for any gas customer (MCLA 483.106; MSA 22.1316)

6) reasonable rates as determined by MPSC for service from any gas-electric utility (MCLA 486.253; MSA 22.1673)

The United States Supreme Court and the Michigan Supreme Court have held that ratemaking is a legislative function. In Michigan, this legislative function has been delegated to the MPSC. Thomas Wellman v The Chicago & Grand Trunk R Co., 83 Mich 592; 47 NW 489 (1890), aff'd 143 US 339; 36 L Ed 176; 12 S Ct 400 (1892); Lenawee County Gas & Electric Co. v City of Adrian, 209 Mich 52; 176 NW 590; 10 ALR 1328 (1920); City of Knoxville v Knoxville Water Co., 212 US 1; 29 S Ct 148; 53 L Ed 371 (1908).

In a prior letter opinion dated July 22, 1971 addressed to Representative Walton concerning HB 4988, I dealt with a proposed utility rate classification based on age, annual income and cooccupancy. In that opinion it was stated:

'Discriminatory legislation is not, per se, illegal. Indeed, the legislature is allowed a great deal of discretion in establishing classes. Lindsley v Natural Carbonic Gas Company, 220 US 61, 31 S Ct 337, 55 L Ed 369 (1910). However, the courts will interfere when the classification is purely arbitrary. The general rule may be stated as follows:

"Inequality in a law does not alone or always invalidate the law, especially where the inequality is in practice or result; to have that effect it must be arbitrary, unreasonable, oppressive, and not properly within the wide field of choice allowed to the legislature.' 16A CJS Constitutional Law, Sec. 505 p. 314.

'In Michigan, the power of the legislature to classify, so as to provide benefits to a distinguishable class, has been upheld. Verberg v Simplicity Pattern Company, 357 Mich 636 (1959). Also, classification has been held valid if any state of facts can reasonably be conceived which would sustain such classification. Baker v State Land Office Board, 294 Mich 587 (1940); Tribbett v Village of Marcellus, 294 Mich 607 (1940). The purpose of the House Bill in question could be conceived of as to protect elderly persons from the dangers of being deprived of necessary public utilities. Given that this is the aim of the legislature, the classification is not arbitrary if made pursuant to such aim. People v Chapman, 301 Mich. 584 (1942).

'Rate and service concessions have frequently been granted to classes of consumers. For example, reduced transit rates for school children have long been permitted. Re Fliming, 69 PUR (NS) 91 (Mass 1947). Likewise, free or reduced rate transportation and utility services have been authorized for religious and charitable institutions. St. Louis S W R v State, 261 SW 996 (Tex 1924); Department of Public Works v West Coast Power Company, 5 PUR (NS) 204 (Wash 1934); Re Ripon United Telephone Co., PUR 1924A 171 (Wis 1923). Furthermore, the Michigan legislature has provided personal property tax relief for persons over 65 years of age whose income falls below a certain level, MCLA Sec. 211.7c; MSA 7.7(4). Likewise, special old age assistance is allowed for persons over 65. MCLA Sec. 400.26(a); MSA 16.426(a).'

The opinion concluded:

'. . . such a classification is not arbitrary, unreasonable or oppressive, and should be held to be constitutional.'

This conclusion is equally applicable to the proposed legislative proposal of creating a separate rate classification for senior citizens earning $8,000.00 per year or less who do not live with more than one person under the age of 65.

Therefore, either the Legislature or the MPSC can initiate rate classifications for utility service as a purely legislative function for the former, and as a delegated legislative power for the latter. However, where proposed rate classifications based on age and ability to pay have been considered, other jurisdictions have held that the agency needs supporting legislation to implement such rate classifications. (1) Michigan statutes clearly prohibit discriminatory rate classifications. In view of these statutory prohibitions, it is my opinion that the Legislature would have to act to create any rate classification based on age and ability to pay. Such a classification should be held constitutional.

Frank J. Kelley

Attorney General

(1) Thus in Pennsylvania Public Utility Commission v Philadelphia Electric Co, 91 PUR 3d 321 (1971) the agency held that any rate discrimination for any socio-economic group (based on the group's ability to pay) is specifically disallowed under Pennsylvania utility law prohibiting any unreasonable preference or prejudice.

In Re Michigan Bell Telephone Co, 94 PUR 3d 321 (1972) the MPSC continued to authorize a low rate 'budget service' for 50 outgoing calls per month, ostensibly for the elderly, sick, low-income customers. It should be noted, however, that this classification is not based on particular customer characteristics but on minimum usage and such service is also available to all customers. See also Re Pacific Northwest Bell Telephone Co, 92 PUR 3d 433 (1972).

In Re Public Service Co of New Hampshire, 95 PUR 3d 401 (1972) an electric utility was not permitted to provide special rates for low income customers unless the legislature acted to provide relief to low-income persons.

In Re Potomac Electric Power Co, 84 PUR 3d 250 (1970) a proposed rate reduction for families of 4 earning $5,500 per year and those on welfare, social security or unemployment compensation was rejected by the agency because under its authority to establish rates which are not unjustly discriminatory, the standard used (i.e. ability to pay) was 'too subjective and too indefinite to provide a sound basis on which to base an obvious rate discrimination.'

In Rhode Island Consumers Council v Smith, 302 A2d 757, 775; 99 PUR 3d 209 (1973) the Court construed a Rhode Island statute which permitted concession rates for 'certain persons sixty-five years of age or over' to allow such rate classification to be initiated by the public utility but not by the regulatory agency.