Could Texas Tech University form a joint venture with a private or municipal utility to build and operate a cogeneration plant?

Texas AG Opinion JM-769: Texas Tech and a Utility Joint Venture

Plain-English summary

Texas Tech University was considering a campus cogeneration facility that would produce thermal energy for the campus and electricity for Texas Tech and the Health Sciences Center. The proposal called for Texas Tech to own 51 percent of the project and a private or municipal utility to own the remaining 49 percent, with excess electricity sold to the utility.

The Attorney General concluded that Texas Tech could not enter the proposed joint venture. A joint venture carried the essential features of a partnership, including shared profits, shared losses, and mutual control or management.

Under the proposed arrangement, the utility would share control of the enterprise and could incur liabilities on its behalf. Because Texas Tech was an arm of the state, its participation would place state credit behind those joint liabilities.

Article III, section 50 of the Texas Constitution barred the state from lending or pledging its credit for the liabilities of any person, association, or municipal or other corporation. The Attorney General therefore found the joint venture unlawful without reaching the request's remaining questions.

Currency note

This opinion was issued in 1987. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

What was Texas Tech proposing to build?

A cogeneration facility that would supply campus thermal needs and electricity for Texas Tech and the Health Sciences Center, while allowing the venture to sell electricity to the participating utility.

Why did the joint-venture label matter?

The opinion described a joint venture as a partnership-like arrangement involving a common enterprise, shared profits and losses, and mutual control or management. Those features meant the utility could create liabilities for the venture.

Did it matter whether the utility was private or municipal?

No. Article III, section 50 referred to a person, association, or corporation "whether municipal or other," so the opinion reached the same result for either type of utility.

Was the project rejected because cogeneration itself was unlawful?

No. The opinion did not decide whether the facility would qualify for state or federal cogeneration rules. It rejected Texas Tech's participation because of the proposed joint-venture structure and the resulting pledge of state credit.

Could a private entity ever participate in a public project?

The opinion said public money could be used to accomplish a proper public purpose even if a private business benefited incidentally, and private entities could help accomplish public purposes when sufficient controls protected the public end. The proposed joint venture failed because shared control and liability went further.

Background and statutory framework

Texas Tech described the project as a way to reduce utility costs. Although it could finance construction through bonds, the university believed a joint venture with a local utility offered an additional financial advantage.

The opinion treated Texas Tech as an official arm of the state whose governing body could exercise only powers delegated by the Legislature. It then applied Texas partnership law to the proposed joint venture, focusing on mutual control and the obligation to share losses.

The Attorney General noted other constitutional provisions concerning public purposes, appropriations, delegation, and governmental participation in corporations. The holding rested on article III, section 50, which prevented the Legislature from authorizing the state to give or lend its credit or pledge it for another entity's liabilities.

Citations and references

Constitutional and statutory provisions:

• Texas Constitution article III, section 50, lending or pledging state credit
• Texas Constitution article XVI, section 6, appropriations for private or individual purposes
• Texas Constitution article VIII, section 3, taxes for public purposes
• 16 U.S.C. section 796(18), cogeneration definitions discussed in the opinion
• V.T.C.S. article 1446c, section 3(c), state definition discussed in the opinion

Selected cases:

• Ayco Development Corp. v. G.E.T. Service Co., 616 S.W.2d 184 (Tex. 1981)
• Corinth Joint Venture v. Lomas & Nettleton Financial Corp., 667 S.W.2d 593 (Tex. App. - Dallas 1984, writ dism'd)
• Federal Energy Regulatory Commission v. Mississippi, 456 U.S. 742 (1982)
• Barrington v. Cokinos, 338 S.W.2d 133 (Tex. 1960)
• City of Galveston v. Hill, 519 S.W.2d 103 (Tex. 1975)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/jim-mattox/jm-0769
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1987/jm0769.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain; the linked PDF is authoritative.

THE ATTORNEY GENERAL
OF TEXAS

August 14, 1987

Dr. Laura F. Cavazos
President
Texas Tech University
P. O. Box 4349
Lubbock, Texas 79409

Opinion No. JM-769

Re: Validity of proposed joint venture agreement between Texas Tech University and a private or municipal utility to construct and operate a cogeneration facility

Dear Dr. Cavazos:

Your letter requesting an opinion of this office advises:

Texas Tech is considering the construction of a cogeneration facility on its campus in Lubbock. The project has the potential for significant savings in utility costs. While Texas Tech could construct the facility through the sale of bonds, there would be additional financial advantage if the project could be done through a joint venture with one of the two local utility companies. This arrangement would provide most of the thermal requirements of the campus and for the electrical needs of Texas Tech and the Health Sciences Center, and provide electricity for sale by the joint venture to the utility company.

In that connection you ask several questions, one of which is phrased:

Can Texas Tech enter into a joint venture arrangement with a municipal or privately-owned utility company? It is proposed that Texas Tech would own 51 percent interest in the project with the utility company owning the remaining 49 percent.

Texas Tech University is an official arm of the state, not a political subdivision. See Bolen v. Board of Firemen, Policemen, and Fire Alarm Operators, 308 S.W.2d 904 (Tex. Civ. App. - San Antonio 1957, writ ref'd); Attorney General Opinion H-365 (1974). Cf. Jagnandan v. Mississippi State University, 373 So. 2d 252 (Miss. 1979), cert. denied, 444 U.S. 1026, reh. denied, 448 U.S. 914 (1980). The governing bodies of state universities are creatures of statute and may constitutionally exercise only powers properly delegated to them by the legislature. See Foley v. Benedict, 55 S.W.2d 805 (Tex. 1932); Attorney General Opinion MW-475 (1982).

A "joint venture" is in the nature of a partnership, an association of two or more persons to carry on a business limited to one particular enterprise. State v. Houston Lighting and Power Co., 609 S.W.2d 263 (Tex. Civ. App. - Corpus Christi 1980, writ ref'd n.r.e.). It is a contractual arrangement whereby there is a community of interest in the venture, an agreement to share profits, an agreement to share losses, and a mutual right of control or management of the enterprise. Ayco Development Corp. v. G.E.T. Service Co., 616 S.W.2d 184 (Tex. 1981).

The law of partnerships is applicable to joint ventures. Shindler v. Harris, 673 S.W.2d 600 (Tex. App. - Houston [1st Dist.] 1984, no writ); Corinth Joint Venture v. Lomas & Nettleton Financial Corp., 667 S.W.2d 593 (Tex. App. - Dallas 1984, writ dism'd). See Thomas v. American National Bank, 704 S.W.2d 321 (Tex. 1986). In Texas, partnerships are recognized as legal entities for most purposes, and a contract made within the scope of a partner's authority for the benefit of the partnership is binding on it even though executed in the name of one partner only. Corinth Joint Venture, 667 S.W.2d at 595.

Cogenerating facilities were discussed in Attorney General Opinion Nos. JM-709 (1987); JM-353 (1985). They are facilities which produce both electric energy and steam, heat or energy in some other useful form that the "cogenerator" uses for its own industrial purposes. 16 U.S.C. §796(18)(A); Federal Energy Regulatory Commission v. Mississippi, 456 U.S. 742, 750 n.11 (1982). If it produces energy in excess of its needs, and is a qualifying facility, it enjoys certain regulatory advantages. A qualifying cogenerator is one which owns a qualifying cogeneration facility, i.e., one which meets the rules of the Federal Energy Regulatory Commission and is owned by an individual or corporation [including partnerships or associations, but not municipalities, political subdivisions or agencies of the state, see 16 U.S.C. §796(1), (4), (7)] not otherwise primarily engaged in the generation and sale of electric power. 16 U.S.C. §796(18)(B), (C); V.T.C.S. art. 1446c, §3(c).¹

We need not decide whether the contemplated cogenerating facility would be a "qualifying" one under the above-cited state and federal statutes exempting its owner from the Texas Public Utility Regulatory Act and bringing it within the field of legislation preempted by federal law. Cf. Attorney General Opinion MW-45 (1979). We need not do so because we have concluded that participation by the university in the proposed joint venture would be unlawful in any event.

Constitutional provisions prohibiting political corporations or subdivisions of the state from becoming a "stockholder" in a corporation, association, or company, see Tex. Const. art. III, §52, or from becoming a "subscriber to the capital" thereof, see Tex. Const. art. XI, §3, are not directly applicable to the university. See Attorney General Opinion H-365 (1974). But other constitutional provisions would be offended by the proposed arrangement.

Because we have concluded that section 50 of article III of the Constitution of Texas precludes participation of the university in such a joint venture with either a private entity or a municipal utility, we will not discuss at length the application of article XVI, section 6, of the constitution, which provides that no appropriation for private or individual purposes shall be made unless authorized by the constitution; the application of article VIII, section 3, which allows the collection of taxes only for "public purposes"; or the application of article II, section 1, which states that the powers of state government shall be divided into three departments, each of which shall be confided to a separate body of "magistracy." See also Tex. Const. art. III, §51.

It is not unconstitutional to expend public money for the direct accomplishment of a proper public purpose even though a privately owned business may be incidentally benefitted thereby. Barrington v. Cokinos, 338 S.W.2d 133 (Tex. 1960); State v. City of Austin, 331 S.W.2d 737 (Tex. 1960). Private entities can be used to accomplish public purposes so long as sufficient controls exist to assure that proper public ends are achieved; but private entities cannot validly be given discretionary authority to control public business, nor can the unconditional use of public credit be granted to them. See Attorney General Opinion Nos. JM-509 (1986); JM-274 (1984); JM-?? (1983); O-690 (1939). Where governmental powers have been properly delegated to an official board, the powers so delegated cannot be validly re-delegated by the board to a private entity. City of Galveston v. Hill, 519 S.W.2d 103 (Tex. 1975).

Article III, section 50, of the Texas Constitution provides:

The Legislature shall have no power to give or to lend, or to authorize the giving or lending, of the credit of the State in aid of, or to any person, association or corporation, whether municipal or other, or to pledge the credit of the State in any manner whatsoever, for the payment of the liabilities, present or prospective, of any individual, association of individuals, municipal or other corporation whatsoever.

This provision prevents the legislature from authorizing the university to lend its credit in aid of or to "any person, association or corporation, whether municipal or other, or to pledge the credit of the State in any manner . . . for the payment of the liabilities, present or prospective, of any . . . municipal or other corporation whatsoever." Inasmuch as the legislature is powerless to give it, the university does not possess the authority to make such an agreement.

In a joint venture such as the one suggested with a utility, the utility, along with the university, would have the discretionary power to set and control the policy of the joint venture owning the cogeneration facility, and to unilaterally incur liabilities on its behalf for which the credit of the university (i.e., the state) would stand bound to answer. See Corinth Joint Venture v. Lomas & Nettleton Financial Corp., supra.

The sharing of mutual losses is an essential element of a joint venture. Ayco Development Corp. v. G.E.T. Service Co., supra. It was because no agreement to share mutual losses or gains was evidenced in State v. Houston Lighting & Power Co., supra, that the court held a joint venture non-existent there. Cf. Russell v. French & Associates, Inc., 709 S.W.2d 312 (Tex. App. - Texarkana 1986, writ ref'd n.r.e.); State ex rel. Grimes County Taxpayers Association v. Texas Municipal Power Agency, 565 S.W.2d 258 (Tex. Civ. App. - Houston [1st Dist.] 1978, writ dism'd).

We advise that Texas Tech University may not, without violating article III, section 50, of the Texas Constitution, enter into a joint venture with a municipal or private utility company. Inasmuch as your other questions were grounded in the expectation that the joint venture arrangement could be entertained, we do not reach them.

SUMMARY

Texas Tech University may not, without violating article III, section 50, of the Texas Constitution, enter into a joint venture agreement with a utility.

JIM MATTOX
Attorney General of Texas

MARY KELLER
Executive Assistant Attorney General

JUDGE ZOLLIE STEAKLEY
Special Assistant Attorney General

RICK GILPIN
Chairman, Opinion Committee

Prepared by Bruce Youngblood
Assistant Attorney General

¹ Three amended versions of section 3(c) of article 1446c were enacted by the 68th Legislature. All define "qualifying cogenerator" by reference to provisions of the Federal Power Act codified as 16 U.S.C. section 796(18)(C). See Acts 1983, 68th Leg., ch. 99, §9, at 497; ch. 263, §21, at 1217; ch. 274, §11, at 1260.