Ira W. Black, Jr. v. City of Killeen, Texas

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN
NO. 03-01-00723-CV
Ira W. Black, Jr., Appellant
v.
City of Killeen, Appellee
FROM THE DISTRICT COURT OF BELL COUNTY, 146TH JUDICIAL DISTRICT
NO. 169,363-B, HONORABLE RICK MORRIS, JUDGE PRESIDING
Appellant Ira W. Black, Jr. appeals the district court=s declaratory judgment entered in
favor of the City of Killeen. Black owns five apartment buildings built between 1986 and 2000 in the City
of Killeen, a home rule municipality. See Tex. Const. art. XI, ' 5; Tex. Loc. Gov=t Code Ann. ' 5.004
(West 1999). At issue in this appeal are tap fees assessed by the City for apartment buildings Black
constructed in 1998 and 2000.1 Prior to 1998, Black paid the City a tap fee per building connection.2 In
1998 and 2000, pursuant to a 1997 amendment to the tap fee ordinance, Black paid a per living unit
1
ATap fees@ are assessed by the City to cover the costs of connecting a customer to the City=s
water and sewer system.
2
For the apartment buildings built in 1986, 1989, and 1994, Black paid only for a water tap and
a sewer tap connection. He paid: (i) $1000 for a water tap and $35 for a sewer tap in 1986; (ii) $1000 for
a water tap and $35 for a sewer tap in 1989; and (iii) $1072 for a water tap and $200 for a sewer tap in
1994.
connection charge.3 In compliance with the amended fee schedule, but under protest, Black paid an initial
base tap charge, plus an additional $300 water tap fee and $300 sewer tap fee for each living unit in the
complexes.
Black filed a declaratory judgment seeking a determination that the fees under the amended
ordinance were (i) unreasonable, (ii) invalid impact fees, and (iii) discriminatory. The City filed a
counterclaim, seeking a declaration that the water and sewer tap fees were valid, enforceable, and not
impact fees. At trial, Black called a rate expert, Bruce Fairchild, who testified in support of Black=s
position. Black also called Killeen City Manager, David Blackburn, as an adverse witness to testify
regarding various aspects of City policy and the City=s process of amending the tap fee ordinance. The City
called its own rate expert, Searcy Willis, to controvert Black=s expert witness.
The district court granted the City=s request for declaratory relief and issued findings of facts
and conclusions of law in support of its judgment. In five points of error, Black appeals that judgment,
contending that the district court erred in finding the City=s tap fees reasonable, valid, and non-
discriminatory. Because we conclude that Black failed to meet his burden of rebutting the presumptive
validity of the City=s tap fee ordinance, we affirm the trial court=s judgment.
3
In 1997, the City amended its ordinance to assess tap fees based upon one of five possible
classifications. Killeen, Tex., Code of Ordinances ' 30-102(b). For multi-family dwellings, i.e., apartment
complexes, the City began charging a connection (tap) fee Afor each living unit,@ as opposed to each building
connection, as it had done prior to 1997. See id. ' 30-102(b)(2).
2
Standard of Review
We presume a home rule charter provision is valid and will not interfere with matters of
municipal government unless the provision is shown to be Aunreasonable and arbitrary, amounting to a clear
abuse of municipal discretion.@ Dallas Merchant=s & Concessionaire=s Ass=n v. City of Dallas, 852
S.W.2d 489, 490-91 (Tex. 1993); see also City of Brookside Village v. Comeau, 633 S.W.2d 790, 792
(Tex. 1982) (AA city ordinance is presumed to be valid[.]@) (citing Thompson v. City of Palestine, 510
S.W.2d 579, 582 (Tex. 1974); Hunt v. City of San Antonio, 462 S.W.2d 536, 539 (Tex. 1971)). A
person challenging an ordinance bears an Aextraordinary burden@ of establishing that the municipality abused
its discretion in enacting the ordinance. Comeau, 633 S.W.2d at 792-93 (citing Thompson, 510 S.W.2d
579; Waxahachie v. Watkins, 275 S.W.2d 477 (Tex. 1955)). In assessing whether the party attacking an
ordinance should prevail, we Aconsider all circumstances and determine, as a substantive matter, if
reasonable minds may differ as to whether a particular@ ordinance is a reasonable exercise of the
municipality=s authority. Id. at 793. Where the trial court issues findings of fact and conclusions of law, we
apply a sufficiency of the evidence review to the factual findings and review its conclusions of law de novo.
Anderson v. City of Seven Points, 806 S.W.2d 791, 794 (Tex. 1991). Thus, although we rely on the fact
finder to resolve disputed facts and accord those facts the same status as if they were determined by a jury,
the ultimate issue of whether the City=s tap fee is valid is a question of law. See City of Austin v. Travis
County Landfill Co., 45 Tex. Sup. Ct. J. 511, 2002 Tex. LEXIS 34, at *15 (Mar. 28, 2002). The
Uniform Declaratory Judgments Act does not alter this standard of review. See Tex. Civ. Prac. & Rem.
Code Ann. ' 37.010 (West 1997); see also Stephenson v. Leboeuf, 16 S.W.3d 829, 842 (Tex.
3
App.CHouston [14th Dist.] 2000, pet. denied); Oak Hills Props. v. Saga Rests., Inc., 940 S.W.2d 243,
244 (Tex. App.CSan Antonio 1997, no writ).
DISCUSSION
In four points of error, Black contends that the City=s tap fee ordinance is invalid. He
contends that the tap fees (i) Aare unreasonable under every standard for judging the reasonableness of tap
fees@; (ii) discriminate Abetween similarly situated customers and between customer classes without a
reasonable basis@; (iii) are illegal because they constitute impermissible taxation;4 and (iv) are impermissible
impact fees. In his fifth point of error, Black argues that the district court erred in denying his request for
attorney=s fees. Before addressing the validity of the City=s tap fee ordinance, we discuss the home rule
charter=s history to provide the context for analyzing Black=s contentions.
Home Rule Charter
Article XI, section 5 of the Texas Constitution authorizes cities having more than five
thousand inhabitants to adopt a home rule charter. See Tex. Const. art. XI, ' 5. Adopted in 1912, the
home rule amendment Aaltered the longstanding practice of having special charters individually granted and
amended by the legislature@ for the State=s larger cities. 22 David B. Brooks, Texas Practice: Municipal
Law and Practice ' 1.17 (2d ed. 1999). The amendment effectively created home rule cities as Amini-
4
Because Black did not assert the taxation argument in the court below, he waives the issue on
appeal. See Tex. R. App. P. 33.1(a).
4
legislatures.@ See id. Thus, cities adopting a home rule charter Apossess the full power of self government
and look to the Legislature not for grants of power, but only for limitations on their power.@ City of Dallas,
852 S.W.2d at 490-91. Accordingly, absent legislation or constitutional provisions to the contrary, a home
rule municipality is free to regulate itself in any manner it chooses. In the context of this appeal, then, we
look to the City=s ordinance to see, not whether the City is authorized to amend the tap fee ordinance as it
did, but whether the amendment is prohibited by some constitutional or legislative restraint on the City=s
authority. See id.
Reasonableness
Black contends that, A[b]y failing to apply any accepted standard, the trial court erred@ in
finding the City=s tap fees to be reasonable. Whether a duly enacted ordinance is reasonable is a question
of law. See City of Lucas v. North Tex. Mun. Water Dist., 724 S.W.2d 811, 820 (Tex. App.CDallas
1986, writ ref=d n.r.e.) (citing Moncrief v. Tate, 593 S.W.2d 312, 314 (Tex. 1980)). In passing upon
reasonableness, judicial review is limited to determining whether the municipality abused its discretion in
passing the ordinance. Id. at 820. Because Black is challenging the validity of the fee assessment
ordinance, he bears the burden of showing that it is unreasonable. See Comeau, 633 S.W.2d at 792.
Repeatedly recognized by the supreme court as an Aextraordinary burden,@ a showing that a duly enacted
ordinance is invalid requires Black to establish A>that no conclusive or issuable fact or condition existed=
which would authorize the [City]=s passage of the ordinance.@ Id. at 792-93 (quoting Thompson, 510
S.W.2d at 581). To be sure, this standard of review does not require the City to show that its tap fees are
reasonable, but places an affirmative requirement on Black to show that they are not.
5
It is generally accepted that a regulated utility may set its rates to ensure it recoups its cost
of providing utility services. Suburban Util. Corp. v. Public Util. Comm=n, 652 S.W.2d 358, 362 (Tex.
1983); see also James C. Bonbright et al., Principles of Public Utility Rates 1988 (2d ed. 1988) (AA
fair-return or fair-profit standard of reasonable rate levels historically has been accepted with reservations
throughout the United States as a controlling basis of rate regulation with respect to those privately-owned
utility companies that have been granted monopoly status by federal and state governments.@). Although
there are distinctions between public and private utilities, Ain so far as treatment of customers is concerned,
the municipally-owned utility is not different from the privately-owned utility.@ City of Texarkana v.
Wiggins, 246 S.W.2d 622, 625 (Tex. 1952). Recognizing this principle, the Texas Supreme Court set
forth factors for judging the reasonableness of a utility=s rate structure in Texas:
[A] proper rate determination is based upon consideration of three factors: (1) the utility=s
reasonable operating expenses; (2) the rate base; and (3) a reasonable rate of return. First,
there must be a determination by the regulatory authority of the utility=s reasonable
operating expenses. . . . [T]he next step is the rate base calculation. After the rate base is
determined, the regulatory authority determines the rate of return, or the percent of the rate
base which will be recoverable in revenues by the utility.
Suburban Util. Corp., 652 S.W.2d at 362 (citations omitted).5 These principles support the proposition
that in setting its tap fees the City is not limited to charging only for the direct costs associated with providing
customers a connection to the water and sewer utility system. What is not clear, however, is what
5
Although Suburban Utility Corp. v. Public Utility Commission involves a Public Utility
Commission order instead of a municipal ordinance, and it relates to rates determined under the utility basis
method, as opposed to the cash basis method, it is instructive for the general principle that a municipal utility
cannot arbitrarily sets its rates. See 652 S.W.2d 358 (Tex. 1983).
6
additional costs the City may include in the tap fees and to what extent the inclusion of these other costs
impacts the overall reasonableness of the ordinance.
Black argues on appeal that had the trial court (i) correctly applied Davis v. Bartonville
Water Supply Corp., 678 S.W.2d 297 (Tex. App.CFort Worth 1984, no writ), (ii) not ignored generally
accepted ratemaking principles requiring fees to be based on the costs of providing services, and (iii)
actually considered the magnitude of the tap fee increase and how it compared to rates charged by other
similar utilities in the region, it would have found the City=s tap fees unreasonable. We address each
argument in turn.
At oral argument and in his brief, Black acknowledged that Bartonville is not completely
analogous to the case at hand. In that case, the court mistakenly employed terminology appropriate for
rates developed using a utility basis method when, in actuality, Bartonville Water Supply Corporation
operated on a cash basis method. See generally id. The parties agree that neither Arate base@ nor Arate of
return@Ctwo of the three factors listed in BartonvilleCare applicable to a utility using the cash basis
method, i.e., the City. Black urges us to read Bartonville as standing for the broad proposition that, Ato
achieve fairness among customers and for economic efficiency, a utility=s rates and charges should generally
reflect the cost of providing a particular service.@ We believe that Black correctly interprets that case as
standing for the general, well-settled ratemaking principles that, in determining its rates, a utility must
consider certain factors and its final rates must be reasonable and not unduly discriminatory. See generally
Suburban Util. Corp., 652 S.W.2d 358. But nothing in Bartonville limits the costs of providing a
7
particular service to the direct costs associated with physically connecting a customer to the City=s water
and sewer systems. To the extent Black contends otherwise, we reject his interpretation of that case.
Having determined the appropriate scope of Bartonville, we conclude that the district court
correctly applied its holding to the case at hand. In Finding of Fact No. 3, the district court found that the
City Aset[] tap fees and rate revenue in an amount sufficient >to maintain and operate the [water and sewer]
system[s] with due regard for anticipated needs to improve, update, construct, and maintain [those]
system[s].=@ The record supports this finding. Even though the City acknowledged that its approximate
cost of physically installing the water tap is $1179 and that its total tap fees exceed that amount, the district
court heard and considered other evidence that would permit it to conclude the overall tap fee rate was
reasonably set.
For example, City Manager Blackburn testified at trial that the City went Athrough a series
of meetings . . . relating to cost analysis for tap fees, [such as] committee meetings, hearing from different
staff, [and] that type of process.@ Black asserts, however, that the evidence shows Athat the challenged tap
fees for multi-family dwellings were not based on the actual cost of connecting a building to the City=s water
and sewer systems and setting up an account . . . .@ He further contends that the City did not perform a rate
analysis until Ayears after the challenged tap fees had been set@ and that the eventual analysis Awas not the
basis for the fees.@ Black also relies on the testimony of his expert witness, Bruce Fairchild, who concluded
that the tap fees were unreasonable. Although Black asserts that the evidence he presented satisfied his
burden of proof, his contention ignores the trial court=s role, as fact finder, to assess each of the witnesses=
credibility and conclusions in light of all the evidence. See Turner v. KTRK TV, Inc., 38 S.W.3d 103, 134
8
(Tex. 2000) (Baker, J., concurring in part, dissenting in part) ( AUnder established Texas jurisprudence, a
reviewing court must defer to the fact-finder=s credibility determinations because the [fact finder] is the
exclusive judge of the facts, the witnesses= credibility, and the weight given to their testimony.@) (citing
Benoit v. Wilson, 239 S.W.2d 792, 796 (Tex. 1951)). That the trial court did not agree with Black or his
expert does not mean it erred. The record includes evidence that, in addition to the City=s direct connection
costs, the district court considered factors such as the City=s cost of updating, improving, and maintaining its
utility system. Thus, we cannot conclude that the district court erred in applying Bartonville.
Black next contends that the City=s tap fees are unreasonable because they do not bear a
substantial relationship to the cost involved in connecting his buildings to the utility system. It is well
established that a utility=s final rate must relate to its actual cost of providing the charged-for service.
Suburban Util Corp., 652 S.W.2d at 362; see also Charles F. Phillips, Jr., The Regulation of Public
Utilities, Theory and Practice 301 (1988) (AThere has always been general agreement that the price for
the service of a public utility should be high enough to cover operating expenses, depreciation, and taxes,
and also allow a fair return on the fair value of the capital invested in the business.@). Typically, a utility
operating on a cash basis, like the City, classifies its costs according to its expenses associated with
customer service, use, meter reading, billing, accounting and collection expenses. John Baur, Effective
Regulation of Public Utilities 39 (1925); see also Niles v. Chicago, 558 N.E.2d 1324, 1332 (Ill. App.
Ct. 1990) (ACash basis accounting determines basic revenue requirements by adding up operation and
maintenance expense, debt service requirements, and capital expenditures that are not debt financed.@);
Phillips, supra, at 766 (explaining revenue determined on a cash basis method includes Aoperating and
9
maintenance expenses, debt service, payment in lieu of taxes, and plant extension, replacements, and
improvements@). To meet his burden of establishing that the City=s tap fee ordinance is unreasonable based
on the City=s cost of providing utility services, Black must show, not that the City=s fees exceed its actual
costs of connecting his buildings to the utility system, but that the fees bear no relationship to the City=s
expenses in providing him such services.
At trial, Fairchild testified that
a fair and reasonable rate is regarded as one that approximates the cost of providing the
service. And the City has admitted that the [$]1179 is the approximate cost of installing a
two-inch water meter, and the $300 is the approximate cost of installing a sewer tap, and
Mr. Black in both 1998 and 2000 was charged well in excess of that cost of providing the
service that he received; therefore, those are unreasonable tap fees.
This assertion erroneously defines the cost of service as merely the cost to the City of providing Black the
physical connections to its water and sewer systems. But experts for both parties acknowledged that tap
fees may include the City=s direct and indirect costs associated with providing water and sewer
connections. Black agrees that, at a minimum, the Aservice provided to a landowner is a physical
connection of the new customer to the water and sewer system [and] also includes the administrative act of
setting up an account for billing and services purposes.@ Black=s evidence, however, establishes only that
the City=s actual cost of physically connecting a customer to its utility system with a two-inch tap is
approximately $1179; he adduced no evidence regarding the City=s indirect costs.
Instead of showing the City=s cost of service, Black attempts to satisfy his burden by arguing
that the tap fees are unreasonable because the City admits to including operation and maintenance costs in
10
both its monthly rates and tap fees: AAccording to Fairchild, those costs should be recovered by the City
through its monthly water and services charges, not through its tap fees.@ Black does not establish,
however, that such a practice is impermissible or that the City is actually recovering more than its costs of
providing Black utility services. Without showing that the City=s tap fees bear no relationship to the City=s
cost of service as defined above, Black cannot satisfy his burden of establishing that the tap fees are
unreasonable. The trial court found that the City set its tap fees Awith due regard for [its] anticipated needs
to improve, update, construct, and maintain the system.@ This conclusion is supported by the evidence.
City Manager Blackburn testified at trial and in deposition that, although the City did not
perform an Aindependent outside cost-of-service study,@ it Adecided to institute [the] per-living-unit fee . . .
because the demands on the City water and sewer system . . . and the continuing demand for maintaining
and operating the system for multi-family buildings causes a greater demand on the system.@ While there is
ample testimony concerning general ratemaking principles and speculative City practices, there is no
evidence to controvert Blackburn=s testimony. Further, it is undisputed that the City may recover costs
related to servicing demands. Without establishing a direct connection between the City=s actual costs and
assessed fees, Black could not show that the City=s tap fees are unreasonable. Neither Black=s nor
Fairchild=s conclusory statements and conjecture are sufficient to establish this link and satisfy Black=s
onerous burden. In the absence of evidence that the City actually assesses tap fees in excess of its total
service costs, we hold that the record supports the trial court=s findings that the City properly set its tap fees
and that they are not unreasonable as they related to the City=s cost of providing Black utility services.
11
Black=s final argument regarding the unreasonableness of the City=s tap fees asserts that the
magnitude of the tap fee increase, combined with a comparison of rates charged by other similar utilities in
the region, shows that the City=s tap fees are unreasonable.6 Black testified that the tap fees for his 1998
and 2000 buildings increased over 1000% from those assessed on his three buildings built before the 1997
amendment took effect. He also explained that, based on his survey of other regions, the City=s tap fees
were disproportionately high. Although this circumstantial evidence shows that the City=s tap fees are higher
than other regions, such evidence is not determinative in deciding whether the City=s tap fees are
unreasonable. See Bartonville, 678 S.W.2d at 300.
While we recognize that concrete evidence may be difficult to procure, we are limited by the
standard of review to determining whether Black established by competent evidence that the City=s tap fees
are in fact unreasonable, i.e., they bear no relationship to its costs of providing utility services. Simply
showing that tap fees increased and/or are greater (even if significantly so) than other regions falls far short
of the proof required to prevail. Without some evidence of the City=s actual expenses for providing utility
6
In his brief, Black states, AWhile these factors alone may not prove that the tap fees are
unreasonable, when considered in conjunction with the analysis of the evidence [of the district court=s
misapplication of Bartonville and the fact that the fees do not relate to the City=s cost of service], all of
these factors in combination make the tap fees per se unreasonable.@ Having rejected Black=s arguments
regarding Bartonville and the City=s cost of service, we analyze whether the magnitude of the increase and
rate differential between other regions alone are sufficient to show the City=s tap fees are unreasonable.
12
service (per the standards set forth above), it necessarily follows that Black cannot carry the substantial
burden of establishing the unreasonableness of tap fees. We hold that neither the evidence regarding the
magnitude of the increase nor of the differential between other regions= tap fees is sufficient to establish that
the City=s tap fees are unreasonable. Having rejected each of Black=s contentions regarding the
reasonableness of the City=s tap fees, we overrule his first point of error.
Impact Fee
13
Black next argues that the tap fees assessed by the City constitute impermissible impact
fees.7 This is so, Black argues, because the tap fees assessed by the City exceed its cost of providing utility
service, and the City uses those excess funds to expand its water and waste facilities.8 The City
acknowledged, in response to a request for admission, that the actual costs for physically connecting a
building to the water tap is $1179 for a two-inch tap (the same size that services Black=s buildings). The
7
An impact fee is
a charge or assessment imposed by a political subdivision against new development in
order to generate revenue for funding or recouping the costs of capital improvements or
facility expansions necessitated by and attributable to the new development. The term
includes amortized charges, lump-sum charges, capital recovery fees, contributions in
aid of construction, and any other fee that functions as described by this definition.
Tex. Loc. Gov=t Code Ann. ' 395.001(4) (West Supp. 2002).
8
Having already addressed Black=s argument regarding the City=s cost of service in providing tap
connections, we limit our discussion here to determining only whether the City uses tap fee revenues to fund
new development.
14
City asserts, however, that because it does not use any funds collected as tap fees to fund new
development, its tap fees are not impact fees.
An ordinance assessing impact fees is invalid unless it complies with the procedures outlined
in Texas Local Government Code chapter 395. See Tex. Loc. Gov=t Code Ann. '' 395.011-.013, .041-
.058 (West 1999 & Supp. 2002). A fee is not an impact fee merely because it is greater than the actual
cost associated with the service for which it is assessed. See Bartonville, 678 S.W.2d at 299. Instead, the
fee must impose upon a new development the burden of generating Arevenue for funding or recouping the
costs of capital improvements or facility expansions necessitated by and attributable to the new
development.@ Tex. Loc. Gov=t Code Ann. ' 395.001(4) (West Supp. 2002). Thus, to prevail Black must
establish that the City uses revenue generated from its tap fees to fund expansion of the utility service to
serve new development.
Black=s expert witness testified at trial regarding his opinion about whether the challenged
tap fees are effectively impact fees. Fairchild stated:
It=s my opinion that the $300 fee for each additional water connection and the $300 fee for
each additional sewer connection, both of which are charged based on the number of living
units, not on the number of taps, are effectively impact fees. That even though they=re
called tap fees they have all the characteristics of an impact fee because they are essentially
assessed above the costs of providing the tap and they are on a living unit equivalent basis
which is how impact fees are typically assessed.
Explaining further, Fairchild testified:
Well, there=s two other items that suggest that they are more akin to impact fees than they
are to tap fees. One of those is when they are assessed . . . . [T]ap fees are normally
15
assessed at the time the tap is actually made; whereas impact fees are . . . more often
[assessed] early in the process, either at when you get a building permit or something prior
to actual installation. Secondly, the history . . . of where the earlier ordinance adopting this
set of tap fees had the moneys from tap fees specifically designated to go into an extension
fund or a fund that was intended to finance extensions of the Killeen water and sewer
system.
Fairchild further testified that his conclusionCthat the City=s tap fees are impact feesCfound support from
the fact that various annual budgets and records of municipal services provided Aevidence that revenue from
the tap fees [was] being used by the City to . . . pay for capital improvements and facility expansions.@
Fairchild=s principle support for this argument came from the fact, Athat Water and Sewer Tapped Revenues
are included in the total revenues of the system. In other words, they=re deposited in the Water and Sewer
Fund. And out of that same fund . . . capital improvement projects are also funded from the Water and
Sewer Fund.@
Fairchild=s testimony distills into the following arguments: the tap fees are in actuality impact
fees because (i) they are assessed above the cost of providing the tap connection, (ii) they are assessed
before the tap is actually made, (iii) earlier versions of the ordinance required the tap fee revenues to be
deposited in an account designated to fund extensions of the City=s water and sewer system, and (iv) the
revenue derived from the tap fees is currently deposited into a general Water and Sewer Fund which also
funds capital improvement projects (new development extensions). The City contends that a fee is not an
impact fee unless it generates revenue for funding or recouping the costs of new development. See Tex.
Loc. Gov=t Code Ann. ' 395.001(4). At trial, Fairchild defined impact fees as Adollars to be used for
capital improvements.@ It appears that the parties agree, as do we, that unless the revenues generated from
16
tap fees are actually used for capital improvements, they are not impact fees. The dispositive inquiry, then,
concerns how the fees are ultimately used, as opposed to how or when they are calculated or collected.
For this reason, only Fairchild=s last two arguments are relevant to our determination of whether the City=s
tap fees are impact fees.
The trial court determined that the City Auses the revenue generated by water and sewer tap
fees >to maintain and operate the system with due regard for anticipated needs to improve, update,
construct, and maintain the [utility] system.=@ Although Black and Fairchild argue that the City=s actions
prior to the 1997 amendment to the tap fee ordinance are evidence of its intent to raise revenue for the
expansion of the utility infrastructure made necessary by new development, they offer no evidence of how
the tap fees were spent during the relevant time period. We acknowledge the difficulty of tracing the tap
fees after they are deposited in the general Water and Sewer Fund, but we cannot relieve Black of his
burden of showing that funds are actually being used to pay for expansion due to new development.
Further, this burden cannot be satisfied by reference to the City=s past practices; nor is it sufficient for Black
to allege that the Arecord includes evidence that the City may use tap fee revenue to pay for capital
improvements and facility expansion.@ (Emphasis added.)
At trial, Black made no attempt to show directly how the City funded facility expansion.
The City=s Director of Finance, Connie Green, testified in deposition that A[t]he City uses a consolidated
cash account [so that] . . . transactions that affect each individual fund are accounted for separately . . . and
can be easily identified.@ Green further stated that: generally all City appropriations are made in the budget;
a project funded during the budgeting process will receive a number code; each department submits
17
payment requisitions with the predetermined code; and the finance department, using the predetermined
codes, processes the transactions and charges them to the appropriate departments. Neither party called
Green as a witness at trial. Despite the apparent availability of City records concerning facility expansion
costs, Black failed to establish the City=s actual practice of funding new development. City Manager
Blackburn=s testimony regarding the general practice of the City=s funding new development is alone
insufficient to establish that the City uses tap fee funds for new development expansion.9
Because the record contains no analysis of the City=s total costs of providing service or the
source of funding for new development expansion, we cannot disagree with the trial court=s finding of fact
that the City Adoes not use tap fees to fund the costs of capital improvements or facility expansion
necessitated by and attributable to new development.@ Accordingly, we hold that Black failed to meet his
burden of establishing that the City=s tap fees are impermissible impact fees. We overrule his fourth point of
error.
Price Discrimination
9
Black adduced testimony from Blackburn that capital improvements and facility expansion are
paid for by issuing revenue bonds and that the City does not pay those expenses from its operating account.
Black=s expert testified that this practiceCdepositing revenues generated from the City=s tap fees into the
general Water and Sewer FundCis typical of municipalities.
18
Black next contends that the City=s tap fees are discriminatory Abecause they do not relate
to the level of service provided to each@ multi-family building. This is so, according to Black, because Aeven
though the tap fee is applied uniformly across the multi-family customer class, relative to the service that [is]
provided, one customer pays more for the same service than another customer.@ At the outset, we
recognize that not all price discrimination is condemned, but only Adiscrimination that is arbitrary and without
a reasonable fact basis or justification.@ Caldwell v. City of Abilene, 260 S.W.2d 712, 715 (Tex. Civ.
App.CEastland 1953, writ ref=d); see also Wiggins, 246 S.W.2d at 624 (stating that a utility service Amay
not discriminate in charges or service as between persons similarly situated . . . unless there is some
reasonable basis for a differentiation@); City of Galveston v. Kenner, 240 S.W. 894, 895 (Tex. 1922)
(explaining that utility Aservice must be given without discrimination between persons similarly situated or
under circumstances substantially the same@). To be sure, public utilities are under a legal duty to charge
reasonable rates and ensure that they are not unduly discriminatory.10 James C. Bonbright et al., Principles
of Public Utility Rates 515 (2d ed. 1998). It is well established, however, that municipalities have the right
to classify customers Abased upon such factors as the cost of service, the purpose for which the service or
10
Price discrimination is assessed against a two-pronged test: (i) reasonableness of rates and (ii)
whether the rates are unduly discriminatory. James C. Bonbright et al., Principles of Public Utility Rates
515 (2d ed. 1998). Discrimination Aoccurs when a seller establishes for the same product or service
different rates which are not entirely justified by differences in cost, or the same rate where difference in cost
would justify differences in price.@ Charles F. Phillips, Jr., The Regulation of Public Utilities, Theory and
Practice 62 (1988). The two bases for price differentiation are Acost of service@ and Avalue of service.@
Id. at 411. When rates are based upon demand, impermissible discrimination occurs; however, A[a] seller
does not [unduly] discriminate when rates are based upon costs, even though some customers pay more
than others.@ Id. at 411. Price discrimination is permitted because it may be more expensive to serve some
customers than others. Id. at 411-12. Accordingly, we recognize that discrimination may reflect policy
considerations on the part of the utility to limit the demands of certain customers on its resources.
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product is received, the quantity or amount received, the different character of the service furnished, the time
of its use or any other matter which presents a substantial difference as a ground of distinction.@ Gillam v.
City of Fort Worth, 287 S.W.2d 494, 497 (Tex. Civ. App.CFort Worth 1956, writ ref=d n.r.e.). But in
classifying its customers, municipalities Amay not discriminate in charges or services as between those
similarly situated.@ Wiggins, 246 S.W.2d at 625. No rule of thumb exists for determining whether
customers are similarly situated. Ford v. Rio Grande Valley Gas Co., 174 S.W.2d 479, 480 (Tex.
1943). The question of discrimination is one of fact and must be decided on a case-by-case basis,
recognizing that
[w]hether differences in rates between classes of customers are to be made, and, if so, the
amount of the differences, are legislative rather than judicial questions, and are for the
determination of the governing bodies of the municipalities. The presumption is in favor of
the legality of the rates established by the rate-making authority, and courts may interfere
only in clear cases of illegality.
Gillam, 287 S.W.2d at 497. The burden of proof remains at all times upon the party claiming a fee is
unreasonably discriminatory.11 Caldwell, 260 S.W.2d at 714; Ford, 174 S.W.2d at 480.
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In arguing that he should prevail because the City Afailed to meet its burden of showing that [its]
discrimination was reasonable and justified[,]@ Black improperly assigns his burden to the City. Black=s
assertion Athat the record is completely devoid of any evidence . . . that the City considered [any] factors in
calculating [its] rates and establishing the tap fee methodology for multi-family tap fees@ also confuses the
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burden of proof. The burden to establish that the tap fees are unduly discriminatory rests with Black and
cannot be satisfied by reference to what evidence the City failed to produce. See Ford v. Rio Grande
Valley Gas Co., 174 S.W.2d 479, 480 (Tex. 1943).
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Black argues that the tap fees are discriminatory because only multi-family customer tap fee
charges include operating and maintenance expenses for the entire utility system; thus, Atap fees for single
family dwellings recover only the approximate cost of making the connection, while the tap fees for multi-
family dwellings are far in excess of the cost of installation of the tap.@ The City=s position is that per living
unit assessments are permissible and nondiscriminatory. The City argues that Black=s contentions do not
take into account that Ait would be nearly impossible to devise a system that perfectly correlated rates
assessed to the number of persons using the system@ and that the City, Ain its discretion, has determined that
assessing tap fees on a per >living unit= basis reasonably recognizes costs associated with [the] increased
demand@ that multi-family buildings place on the system. We agree with the statement of our sister court in
a similar case involving a challenge to an ordinance requiring some water customers to pay higher rates than
others: AThe interest and needs of the numerous water users served by a city are such that it is improbable,
if not impossible, that any classification or rate basis could be devised which would not in some way
discriminate against some users.@ Caldwell, 260 S.W.2d at 715.
The City was well within its authority to set its tap fees. It was Black=s burden to show that
the City=s tap fee structure assessed different rates for different classes of customers and that such a
Adistinction [was] not justified by the difference in factors properly@ considered by the City in establishing
the rate structure. Gillam, 287 S.W.2d at 497. Black asserts that, because the City=s monthly water rates
account for operations and maintenance costs, the City cannot also include those costs in assessing its tap
fees. The City ordinance assesses tap fees based upon one of five classifications: (i) residence (one
connection charge); (ii) multi-family (one connection charge for each living unit); (iii) commercial (one
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connection charge for each certificate of occupancy issued or meter, whichever is greater); (iv) industrial (as
authorized by city council); and (v) mobile home park and manufactured home subdivisions (one connection
charge for each living unit). Killeen, Tex., Code of Ordinances ' 30-102(b). On its face, the ordinance
permits the City to assess each occupant of a building a connection charge; that there are more occupants in
multi-family dwellings and commercial properties does not make the tap fee structure per se discriminatory.
Black points to no evidence in the record to support his position that the City is prohibited from recouping
a portion of its operation and maintenance costs through its tap fees. Thus, on the record before us, we
cannot say the trial court erred in finding that Black failed to establish that the City=s tap fees are unduly
discriminatory, that is, that the City=s reasons for discriminating were not justified by reasonable bases.
Accordingly, we overrule Black=s second issue.
Attorney=s Fees
Black=s fifth point of error challenges the trial court=s denial of his request for attorney=s fees.
Under the Uniform Declaratory Judgments Act, a trial court may award attorney=s fees Aas are equitable
and just.@ Tex. Civ. Prac. & Rem. Code Ann. ' 37.009 (West Supp. 2002); Brainard v. State, 12
S.W.3d 6, 27 (Tex. 1999). When a trial court denies claims for attorney=s fees under the Act, its decision
is reviewed for an abuse of discretion. See Bocquet v. Herring, 972 S.W.2d 19, 21 (Tex. 1998).
Whether a party prevails in a declaratory judgment action is not a determining factor in awarding attorney=s
fees. See Commissioners Court v. Agan, 940 S.W.2d 77, 82 (Tex. 1997); Barshop v. Medina County
Underground Water Conservation Dist., 925 S.W.2d 618, 637 (Tex. 1996). Because Black presents
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no evidence on appeal that the trial court abused its discretion, we overrule his fifth point of error and affirm
the trial court=s judgment denying his request for attorney=s fees.
CONCLUSION
Black failed to establish that the City=s tap fees are unreasonable because there is no
evidence that such fees are in excess of the City=s cost of providing utility services. Further, without proof
of the City=s actual expenditures, Black failed to show that the City impermissibly uses tap fees to fund new
development and is thus an impact fee. Finally, because Black did not establish that the City lacks a
reasonable basis to classify customers differently, he also failed to establish that the tap fees are
discriminatory. Black did not carry his substantial burden of establishing that the City=s tap fee ordinance is
invalid. Thus, we cannot say that the trial court=s judgment in the City=s favor is incorrect. Accordingly, we
overrule Black=s five points of error and affirm the trial court=s judgment.
Jan P. Patterson, Justice
Before Justices Kidd, Yeakel and Patterson
Affirmed
Filed: May 31, 2002
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