June 30, 2010
Re: free water and sewer service provided to school
Dear Mayor,
Your MTAS Management Consultant posed questions to me about the practice and
agreement by the City to provide free water to an elementary school. It is my understanding that
the City has done so for about 8 years, since the passage of a resolution on November 12, 2002.
The City agreed to provide free water as an inducement for the school district to build an
elementary school inside City limits. Outside the resolution, it does not appear that a contract
exists addressing this agreement.
Tennessee Code Annotated§ 7-35-414 is the statute that requires cities to set and adjust
rates for water and sewer service, and such rates must be sufficient to “pay all reasonable
expenses of operation” of the system. Subparagraph (a) requires that municipal water and sewer
systems provide service to customers charging only “just and equitable rates,” in the following
language:
The governing body of any city or town acquiring and operating a waterworks or
sewerage system under the provisions of this part has the power, and it is the governing
body's duty, by ordinance, to establish and maintain just and equitable rates and charges
for the use of and the service rendered by the waterworks or sewerage system, to be paid
by the beneficiary of the service.
This language is interpreted as prohibiting cities from providing free water or sewer service to
any customer, as such a practice would result in the necessity to raise rates for paying customers,
which would violate the “just and equitable rates” requirement. The Tennessee Attorney General
has opined that cities may not provide service at discounted rates to charitable organizations.
Op. Tenn. Atty Gen. 97-127.
The Tennessee Court of Appeals considered this statutory language and other issues in
the case City of Parsons v. Perryville Utility District, 594 S.W.2d 401 (Tenn. App. 1980). The
City of Parsons entered into a 45 year contract to sell water to the Perryville Utility District. One
provision of the contract stated that the water rates could be modified every five years, but that
“any increase or decrease in rates shall be based on a demonstrable increase in the cost of
performance hereunder, but such costs shall not include increased capitalization of the City
system.” The Court struck down that portion of the contract, finding it to be in violation of the
above statutory language. The opinion cites the following language from the treatise Corpus
Juris Secundum, 94 C.J.S. Waters § 297:
Where water furnished is all supplied from the same sources, and is supplied to several
contiguous communities embraced in one general district, with no unreasonable
extensions to serve lean territory or other elements creating material difference in cost, a
uniform rate for the entire territory is indicated and ordinarily justified…A classification
must, however, in order to be valid, comport with the rule or principle of sound
legislative classification, in that there must be some actual difference of situation and
condition, bearing a reasonable and just relation to the matter of rates; and an arbitrary or
unreasonable classification amounts to unjust discrimination. Likewise, it is unjust
discrimination to differentiate between different services by charging rates for one which
are out of all proportion as compared with the rates charged for another, or to impose on
one consumer, or class of consumers, losses caused by charging inadequate rates to
another consumer or class. City of Parsons, at p. 406.
Finding that our state law imposes the obligation on cities to set just and equitable rates,
and to revise those rates so as to provide revenues to support the system, the Court determined
that the City had no power by contract to hamper or impair this statutory duty. The Court states
“the city had no power to bind itself to a rate for forty-five years which was not subject to
increase to reflect the costs of increased capitalization of the system.” Id. at 407.
Based on the City of Parsons case and other research, it is my conclusion that your City
does not have the legal authority to provide free or sewer service water to a school, or to any
other entity. Such actions violate our statutes requiring that rates be equitable and that rates
charged be sufficient to fund the operations of the water system.
Your MTAS management consultant posed the following questions:
Does the legal staff feel…that Tennessee cities may not enter into contracts to provide
free water to any particular party? Yes. I have consulted with MTAS Senior Legal Consultant
Sid Hemsley, and he agrees that such contracts or agreements are prohibited by law and are
unenforceable.
If the City lacks authority to enter into such agreements, what is the enforceability of the
City’s 2002 resolution? Can it be enforced by either party? No. The resolution is not an actual
contract, although the school district is the beneficiary. In any event, it is not enforceable, and
the City may simply repeal the resolution.
In the event of a lawsuit, the school district will likely claim (1) that both parties entered
into this arrangement in good faith; and (2) that the school district’s site selection decision was
predicated in large part on the inducement of free water. In your opinion, would such an
argument be successful? How might the City respond to this position? No, such an argument at
trial would not be successful. The City may rely on the case City of Parsons v. Perryville Utility
District, 594 S.W.2d 401 (Tenn. App. 1980) for the principal that such agreements, contracts or
arrangements are illegal and unenforceable, despite the intent of the parties or good faith
dealings. A motion for summary judgment containing this legal argument should be sufficient to
defeat a lawsuit, without the expense of a trial. It is interesting that no actual written contract
exists between the City and the school district. A resolution is not a contract, and may be
repealed on one vote of the governing body.
If the City lacks the authority to give the school district free water, what are the
implications of continuing to do so at this point? Other customers and ratepayers of the City
water and sewer system can sue the City for refund of rates paid, if it is shown that rates have
been adjusted since 2002 to compensate for the cost of free service being provided to the school.
If rates have not been adjusted since free water and sewer service for the school was instituted,
then how has the City funded the utility operations? The underlying question is “how much has
it cost the paying customers of the water system to fund this free water and sewer service given
to the school?” I do not know the specific operations of the municipal auditing system enforced
through the Comptroller’s office and through the TDEC division that oversees rate setting and
water loss accounting. It appears that steep increases in rates will be required to remedy this
situation, whether the City voluntarily imposes such rates or is forced to do so under court or
agency order.
I hope this information is helpful. Please let me know if you need further assistance.
Sincerely,
Melissa A. Ashburn
Municipal Legal Consultant