March 22, 2005
Dear Sir:
Question
You have the following question: Can the Utilities Board enter into an agreement with the
Water Cooperative under which the former would maintain the latter’s system and provide it
water-testing and state report filing services? The Water Cooperative would continue to manage
its own billing and collection and other administrative functions.
Answer
In my opinion, the answer is probably no, but the question could be a close one. The
utilities system is unquestionably a municipal utility system and a department of the city
government. [See Keeble v. Loudon Utilities, 370 S.W.2d 531 (1963).] The Water Cooperative
is private water system, a mutual benefit corporation, and a public utility. There appears to be no
express or implied authority in the general utility laws of the state or in the City Charter
authorizing the Utility Board to enter into the maintenance contract contemplated by the
question. (There appears to be no reason the Water Cooperative would not have the authority
under its charter and the Tennessee Corporations Act to generally contract out the maintenance of
its system).
One statute, Tennessee Code Annotated, ' 7-34-104, may permit the Utilities Board to
enter into the contract in question. That statute is discussed below. In addition, municipalities in
Tennessee operate their utility systems in their proprietary capacities. The proprietary capacity
gives utilities some business discretion. But I do not think either Tennessee Code Annotated, '
7-34-104 or the proprietary capacity of utilities in Tennessee are enough to support the contract,
but I point to the possibility that one or both of them might.
Analysis
Municipalities in Tennessee operate their utility systems under various state statutes.
However, some of them operate their utilities under their charters. Your city is a home rule
charter city under Article XI, ' 9, of the Tennessee Constitution (Ordinance 229, adopted by
referendum, April 6, 1964; subsequently amended several times). The City apparently operates
its utilities under its charter.
The Water Cooperative was established in 1969 under Tennessee’s Corporation Act. It is
described in its corporate charter as a “body politic and corporate....for the purpose of
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constructing, operating and maintaining a private water system for the supplying of water for
domestic livestock, commercial, industrial and garden purposes to its members.” As far as I can
determine, no Tennessee case defines the term “body politic and corporate” (although the
Tennessee Court of Appeals in Nashville Housing Authority v. Taylor, 442 S.W.2d 6689 (1968)
pointed to the Housing Authority Law which described a housing authority as a “Public body and
a body corporate and politic” [At 672], and went on to declare that it performed public
functions). However, cases from other states have defined that term, including Kennelly v. Kent
County Water Authority, 89 A.2d 188 (1952). There the Court, attempting to determine whether
a water authority declared by its enabling statute to be a “body politic” was a municipal or a quasi
municipal corporation, said:
The term ‘body politic’ is of ancient origin and generally connotes
the collective body of citizens exercising political functions of the
state. 11 C.J.S., Body, p. 380. The distinguishing feature of a
municipal or quasi-municipal corporation is that it is not only a
body corporate but also a body politic the components of which,
the corporators, are endowed with the right to exercise in their
collective capacity a portion of the political power of the
state....Such a corporation is more than a mere ‘public benefit
corporation.’ There are a variety of corporations of that character
such as railroads, telephone, gas, electric, water, and turnpike
corporations which, even though privately owned, perform a public
service and are sometimes referred to as public service
corporations, but they are neither municipal nor quasi municipal
corporations.... [At 191]
Utah State Building Commission v. Great American Indemnity Co., 140 P.2d 763 (1943),
(citing Words and Phrases, Perm.Ed. P. 6702), says:
....[T]he term “body politic” is an old term for a corporation or an
association of individual, and usually applied to the state or other
public associations....The term “body corporate” is a term of more
common usage. 1 Bouv. Law. Dict., Rawles Third Revision, p.
374, says, “Body corporate: An early and undoubtedly correct term
to apply to a corporation.” At 8 Corpus Juris. P. 1136, the term
“body corporate” is defined as a corporation; 11 C.J.S. Body, p.
379 states: “Body corporate is a term applied to a corporation,
public and private.” Black, Law Dictionary, gives a similar
definition and adds: “Body corporate and politic: A term
particularly applied to a public corporation having powers and
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duties of government.” [At 766]
Article V of the Water Cooperative Charter declares that “The corporation is organized
on a nonprofit basis for the mutual benefit of its members....” In 1987 the Tennessee
Corporations Act was totally revised. Under that revision, two classes of nonprofit corporations
were created: public benefit corporations and mutual benefit corporations. It appears that under
the definitions prescribed for each type nonprofit corporation, the Water Cooperative remains a
mutual benefit corporation. [See Tennessee Code Annotated, ' 48-68-104] As far as I can
determine, the distinction in the Tennesseee Corporations Act between public benefit and mutual
benefit corporations is not important to the question.
The Water Cooperative apparently has the power of eminent domain, by virtue of
Tennessee Code Annotated, ' 65-27-101. It has been held that private water companies are
“public utilities.” [See Nashville Water Co. v. Dunlap, 138 S.W.2d 424 (1940)], and that a water
company that has the power of eminent domain is a quasi-public corporation. [See Farmer v.
Nashville, 156 S.W. 189 (1912); Crumley v. Wautaga Water Co., 41 S.W. 1058 (1897)]. But
nothing in the general laws of the state governing either corporations or utilities elevates Water
Corporation to the status of a municipal utility or even a quasi municipal utility.
Article XVIII, ' 1(5) and Article XXIII, ' 1, of the City Charter create the Utilities
Board, and Article XXIII of that charter prescribes in considerable detail the operation of the
city’s utility system. (Other provisions governing the operation of the city’s utilities are also
found in Article III of that charter, but those provisions are not pertinent to the question).
Article XXIII, ' 9 speaks of the authority of the Utilities Board to enter into contracts,
generally and specifically, as follows:
(Subsection (a))
make all contracts and do any and all acts and things that are
necessary, convenient or desirable in order to operate, maintain,
enlarge, extend, preserve and promote an orderly, economic and
businesslike administration of the system....
(Subsection (d))
The board may....execute deeds and enter into leases, contracts and
agreements, provided the term of such leases, contracts and
agreements shall be limited to not more than twenty (20) (sic.)
from the date of performance thereunder is to begin, and not more
than twenty-two (22) years from the date of the execution thereof.
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All contracts whereby the system agrees to supply electric service,
gas, (sic.) service, water service, or sewer service, or two or more
of the foregoing services, for a longer period than one year from
the time if (sic.) the execution of such contract, shall be subject to
the condition that the rates at which such service is to be provided
after the expiration of one year from date of the contract, shall
conform to the rates being charged other customers for similar
service or services....
The Tennessee Corporations Act generally gives all corporations the authority to “Make
contracts and guarantees....” [Tennessee Code Annotated, ' 48-58-103(7)].
Nothing in the above provisions expressly or even impliedly authorize the Utilities Board
to enter into contracts with private (or probably even a municipal) utility under which the board
would be responsible for the maintenance, water-testing, and filing of state reports for that utility.
The contracts of which the City Charter speaks appear to be contracts that promote the interests
of the utility system, and contracts under which it supplies actual utility services: electricity, gas,
water and sewer service. It is difficult to see where such a contract would benefit the utilities
system, except in the general way that any contract the board enters into might be revenueproducing.
Tennessee Code Annotated, ' 12-9-101 et seq., authorizes “public agencies” to enter into
interlocal agreements. However, the definition of “public agency” in that statutory scheme does
not appear to include private utility companies (although it does include private incorporated fire
departments and rescue squads, and industrial fire departments).
Contracts between “municipalities” for the use of sewer and water pipes are authorized by
Tennessee Code Annotated, ' 7-35-101 et seq., but the contract contemplated does not involve
the use of such pipes, and the Water Cooperative is not a “municipality” with whom the Utilities
Board could contract under that statutory scheme.
A similar provision found in Tennessee Code Annotated, ' 7-35-416, authorizes “cities
and towns” (but not cities and private utilities) to contract with each other for water and sewer
service, but that statute specifically limits such contracts to the capacity of the plant, which
strongly implies that the contracts envisioned by that statute are limited to the actual provision of
utility services. In addition, that statute applies to municipalities operating their sewer and
waterworks under Tennessee Code Annotated, ' 7-35-401. The Utilities Board operates its
water system under its charter.
Utility billing and collection service contracts among counties, municipalities, utility
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districts and cooperatives, are authorized by Tennessee Code Annotated, ' 7-51-402. In
addition, Tennessee Code Annotated, ' 7-35-201(6)(A), provides that any municipality that has
issued bonds for sewer services has the power:
To enter into the contracts for the collection of such sewer charges
with any public or private corporation or municipal utilities board
or commission operating a water system therein, and any public
corporation or municipal utilities board or commission is
authorized and empowered to make contracts with any other city,
town or utility district
(i) To meter, bill and collect sewer charges as an added designated
item on its water service bills; or otherwise;
(ii) To discontinue water service to sewer users who fail or refuse
to pay sewer service charges.
But nothing in those statutes include a contract for maintenance between the above
utilities.
The statute that comes nearest to support the contract in question is Tennessee Code
Annotated, ' 7-34-104, which provides that:
(a) In addition to powers which it may now have, any municipality
has the power under this chapter to:
****************************************************
(2) Operate and maintain any public works for its own use or for
the use and benefit of its inhabitants, and also operate and maintain
such public works for the use and benefit of persons, firms and
corporations (including municipal corporations and the inhabitants
thereof) whose residences or places of business are located outside
the territorial boundaries of such municipality;
There are at least two problems with relying on this statute to support the contract. The
first problem is that the statute is part of the Revenue Bond Law. It was held in Nashville
Electrical Service v. Luna, 204 S.W.2d 529 (1947) that the Revenue Bond Law did not apply to a
city utility system operated under the city’s charter. But a number of recent cases indicate that
the courts today might not even ask the question of whether a municipal utility operates under the
Revenue Bond Law before they conclude that Tennessee Code Annotated, ' 7-34-104 applies to
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the utility. [See the reported cases of Duck River Electric Coop. v. City of Manchester, 529
S.W.2d 202 (Tenn. 1975); City of South Fulton v. Hickman-Fulton Counties, 976 S.W.2d 86
(Tenn 1998); and Town of Dandridge v. Patterson, 827 S.W.2d 797 (Ct. App. 1991). Also see
the unreported cases of Phillips v. Metropolitan Government Nashville and Davidson County,
1991 WL 202479 (Ct. App.); Albmont v. Town of Pegram, 2004 WL 45595 (Ct. App.); Tucker
Corp. v. City of Clarksville, 2002 WL 2250811 (Ct. App.).] Although none of those cases
involved a question similar to the City’s Utility Board, they suggest that the first problem
involved in applying this statute to the contract might be overcome.
But the second problem is that the policy of the Revenue Bond Law contained in
Tennessee Code Annotated, ' 7-34-103, is that:
[A]ny municipality acquiring, purchasing, constructing,
reconstructing, improving, bettering or extending any public works
pursuant to this chapter shall manage such public works in the
most efficient manner consistent with sound economy and public
advantage, to the end that the services of the public works shall be
furnished to consumers at the lowest possible cost.
There can be little doubt that the “services of the public works” that “shall be furnished to
consumers at the lowest possible cost” of which that policy is speaking are utility services.
The General Assembly has spoken extensively in the general utility laws of the state
about the contractual powers of utilities, and in the City Charter about the specific contractual
powers of Utilities Board. With the exception of Tennessee Code Annotated, ' 7-34-104, which
likely does not even apply to the City, nothing the General Assembly has said supports the
contract in question.
But it has been regularly held that Tennessee municipalities operate their utilities in their
proprietary capacities rather than their governmental capacities. The significance of that doctrine
is seen in Bybees Branch Water Association v. Town of McMinnville, 333 S.W.2d 815 (Tenn.
1960):
‘A municipal corporation engaged in the business of supplying
public utilities and facilities is regarded as a public corporation
transacting private business for hire, and, in that respect and to that
extent, as a public or quasiprivate corporation.’ 62 C.J.S.
Municipal Corporations, Sec. 3, p.73.
‘The city in its operation of utilities herein does so in its
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proprietary or individual capacity rather than in its legislative or
governmental capacity. It is thus governed, for the most part, by
the same rules that control a private, individual or business
corporation. [206 Tenn. 375] City of Knoxville v. Heth, 186 Tenn.
321, 210 S.W.2d 326, 329.
[Also see City of Shelbyville v. State ex rel Bedford County, 220 Tenn. 197, 415 S.W.2d 139
(Tenn. 1967); Batson v. Pleasant View Utility District, 592 S.W.2d 578 (Tenn. App. 1980);
Maury County Board of Public Utilities v. City of Columbia, 854 S.W.2d 890 (Tenn. App.
1993)]
It is also said in 12 McQuillin, Municipal Corporations, 3rd Ed. Revised, ' 35.27, that:
In the management and operation of its plant, a city is not
exercising its governmental or legislative powers, but its business
powers, and may conduct it in the manner which promises the
greatest benefit to the city and its inhabitants in the judgment of
the city council. It is not within the province of the court to
interfere with the reasonable discretion of the council in such
matter. However, municipalities may not exercise their
discretionary authority in a manner that compromises a public
policy....
But all the above cases that point to the proprietary power of municipal utilities involve
contracts on the part of a utility for the supply and purchase of actual utility services and the
financial arrangement for such services. Such contracts are clearly contemplated in the general
laws of the state and in municipal charters under which utilities operate, including the City
Charter. Indeed, the reason for the existence of such utilities is the provision of such services.
Arguably, the proprietary power of utilities is confined to the scope of service that the utility is
entitled to provide under the appropriate statutes or charter. Indeed, 12 McQuillin, Municipal
Corporations, 3rd Ed. Revised, ' 35.32, says:
A municipality that has its own water or light plant, or public
transportation system, may make all the contracts and engage in
any undertakings, as an incident to municipal ownership, which are
necessary to render the system efficient and beneficial to the
public, frequently including the power to contract with other
municipalities, or with individual nonresidents, or with federal
agencies, although it cannot by contract, limit or curtail the
exercise of the power conferred upon it or barter it away....The
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municipality cannot carry on as an incident a business that is not
essential to the accomplishment of any of the purposes for which
the water or light or street railway plant was acquired.
It is difficult to see how the Utility Board’s contract with the Water Cooperative would be
anything but an incidental business that is not essential to the accomplishment of any purposes
for which the Utility System was established.
Sincerely,
Sidney D. Hemsley
Senior Law Consultant
SDH/