From: Ashburn, Melissa Ann
Sent: Wednesday, March 09, 2011 3:59 PM
Dear Sir,
This is a follow up to an email I sent to your MTAS Management Consultant last week
concerning the Utility Board’s potential purchase of the water and sewer system
servicing another site. I opined in that email that the Utility Board cannot agree to a
contract clause that limits increases in water rates to those based on the consumer price
index, based on the enterprise fund nature of water/sewer operations, and the statutory
requirement that the system be self-supporting and rates be adjusted for capital
improvements of the system.
You asked me to look at the unreported case Harriman Utility Board v. White Branch
Utility District, 1986 WL 11473 (Tenn. App. ES 1986). In this opinion, the Court of
Appeals opined that the utility could be held to a contract provision limiting rate
increases, and specifying that rates cannot be increased to fund increased capitalization
of the city system. The Court based its opinion on its conclusion that T.C.A. 7-35-401, et
seq. (grants authority to own and operate water and sewer systems) does not apply to
that utility, due to formation under the Municipal Electric Plant Law of 1935. However,
the Court based that analysis on the old tort liability issue of governmental vs.
proprietary functions, stating “when a city operates a water department, the city is
engaged in a proprietary function rather than a governmental function. Thus it is subject
to tort liability for injuries done by its water system…..Thus, operating in a proprietary
function the parties are bound by their contract…” Harriman Utility Board, page 2. No
other court case, no treatise, and no Attorney General opinion cites this case for any
legal authority. However, the point is well taken that if your City started its water and
sewer plant under private act authority, it may be able to avoid application of the general
law provisions governing municipal water and sewer plants. See Killion v. Paris, 241
S.W.2d 524 (Tenn. 1951).
Do you have the utility charter or city ordinance under which the water or sewer board
was originally established, or such utilities were operated by the governing body, before
it was combined with the electric board? The only language in the charter that
addresses the power of the city in this regard states the city has the power “to construct,
purchase, acquire, by condemnation or otherwise, lease, own, operate and maintain an
electric power plant and distribution system….water pumping plant and distribution
system, sewerage disposal system, and/or any other utilities….” Section 9, your
Charter. There is no language stating how such water system shall be run, whether a
water board is established, how rates are set or any other particulars regarding how the
city is to operate its water and sewer system. Later, of course, control over the water
and sewer utility was given to the utility board. The issue of how exactly the City came
to operate the water and sewer utility, before it was transferred to the utility board, is the
determining factor of whether the general law provisions on rates and water and sewer
plants are applicable. If no private act exists containing such authority, the general law
applies. But what if the private act only states the city has the authority to acquire or
build a water plant? In my opinion, if it is lacking in specificity the general law fills in the
blanks or gaps and controls on specific issues not addressed in the private act.
Chapter 332 of the Private Acts of 1941 approved a bond issue for “increasing and
improving water mains and lines,” so the water utility existed before that date. The
general law is not cited in this private act. I have reviewed all the private acts pertaining
to your City, passed between 1905 and 2008, and haven’t found any helpful language.
As the Attorney General states when grappling with this same issue:
“Applicability of these statutes depends on facts and circumstances not directly available
to this Office. For example, several statutory schemes authorize a municipality to finance
and operate a water and sewerage system. See, e.g., Tenn. Code Ann. §§ 7-34-101, et
seq.; Tenn. Code Ann. §§ 7-35-101, et seq.; and Tenn. Code Ann. §§ 9-21-101, et seq.
Each of these statutory schemes provides that it is intended to be supplemental to
powers conferred by other laws. Tenn. Code Ann. § 7-34-118; Tenn. Code Ann. § 7-35432; Tenn. Code Ann. § 9-21-124. A municipality could operate a water and sewerage
system under any one or more of these statutory schemes. Whether any particular
statutory scheme governs a particular municipal system would depend on facts and
circumstances not available to this Office. For example, a municipality that financed its
system by issuing bonds under Tenn. Code Ann. §§ 7-34-101, et seq. would be subject
to the provisions of that statutory scheme.”
Tenn. Op. Att'y Gen. No. 97-127 (Sept. 8, 1997) Without having more information about
bond issues, outstanding or satisfied, or private act powers outside your charter, it is
impossible to make a clear call on this issue. In my 10 years at MTAS, I cannot
remember any utility being exempt from at least one of these regulating statutes, due to
bonds issued by those cities.
In any event, it may be possible to simply insert some language in the contract between
other site and the Utility Board to address the issue. I suggest that the section of the
contract stating that rates shall only be increased according to the consumer price index
be altered by adding the following language: “…except as may be required by State or
Federal law or regulation,” or similar language. You have informed me that the City has
not had to issue bonds or use loans to expand water or sewer lines in many years. You
also do not anticipate that any capital expenditures will outpace your current rate
structure. Inserting some language to provide some wiggle room would be wise, in case
regulations change to such an extent that major improvements to the plant are
required. Also, as we have discussed, if this one section of the contract is invalidated,
the court will most likely uphold the remainder of the agreement.
I wish I could give you a clear yes or no to the question you have raised about the
application of T.C.A. 7-35-101, et seq. and those laws applicable to water and sewer
utilities operated by cities. Has the Board relied on general law provisions contained in
T.C.A. 7-35-101, et seq. to force people to connect to the system (T.C.A. 7-35-201) or
for any other action? If so, they may have opted in by such actions. I am also curious
about any bonds issued, and whether they were tied to these laws. Without having a
clearer picture, I agree you have a point, and I cannot say the proposed contract
provision limiting water rate increases is illegal or legal. More information, some of it
historical and beyond my reach, is necessary to reach a firm conclusion.
Although no clear answer is provided, I do hope this information is helpful,
Melissa A. Ashburn
Legal Consultant
University of Tennessee
Institute for Public Service
Municipal Technical Advisory Service
(865)974-0411