Request By:
Mr. Paul W. Blair
Hogge, Blair & Dehner
Attorneys at Law
120 Normal Avenue
Morehead, Kentucky 40351
Opinion
Opinion By: Robert F. Stephens, Attorney General; By: Elizabeth E. Blackford, Assistant Attorney General
In your letter of May 15 you explained that the Morehead Utilty Plant Board, which manages the municipally owned gas, water and sanitary sewer system, is intending to enforce a rule requiring payment of a 10% service charge and penalty on any bill not paid in full by the 15th of the month. You have received a letter from the Northeastern Kentucky Legal Services notifying you of their intent to challenge this rule on the grounds that the service charge and penalty is usurious interest rather than a true service charge. You have asked whether the service charge and penalty is usurious or otherwise in violation of the law, and if so, what amount of service charge or penalty is permissible. You also asked whether it would be permissible to raise all rates by 10% and then give a 9% discount to those paying by the 15th rather than imposing a service charge and penalty for late payment.
Currently, in Kentucky, this area is controlled by Covington v. Sanitation District No. 1 of Campbell & Kenton Counties, Ky., 301 S.W.2d 885 (1957). In that case the court held that a sewer district could impose a 10% penalty where sewer service charges were not paid within the prescribed time period. Therein the Court said:
"Finally appellants insist that the district had no right to impose a penalty of ten percent in cases where the sewer service charge was not paid within the time fixed by the district. This action might be viewed as a discount given by the district in order to encourage prompt payment of bills. It is so termed in general practice, the reason being, no doubt, that private individuals may not impose a penalty in the absence of an express contract concerning liquidated damages for failure to pay an account. Such is not the case with the sovereignty or one of its subdivisions. It has long been settled that such an entity may assess penalties in cases of nonpayment of taxes and other items. . . the right to impose a penalty for delinquent payment comes within the powers specifically granted to the district to fix rates and compensation or rental to be charged for the services rendered."
As acting agent for a fourth class city, the Morehead Plant Utility Board is a subdivision of the sovereignty authorized to fix the rates charged for utility services. See KRS Chap. 96. As such, it falls within the purview of the foregoing language. Therefore, it is the opinion of this office that the Morehead Utility Plant Board may enforce the rule adding a 10% service charge and penalty and that this rule is not violative of Kentucky law. Because of this result we find discussion of your other questions unnecessary.
Despite this result it is our opinion that the decision in Iowa v. Town of Legrand, (D.C. Iowa (1978) 46 LW 2361 is highly persuasive and indicative of the current trend in the law. In that case the court held that a 10% delayed payment charge which was imposed on those not paying their water bills within the prescribed time was usurious interest. Their decision was based upon the fact that the delayed payment charge is functionally synonymous with traditional interest charges and upon the fact that the delayed payment charge acted as consideration for the forbearance of the city from immediate collection of the bill. Thus, the court concluded that the delayed payment charge was disguised interest being extracted in violation of Iowa's usury statute.
Generally, a public utility may exact a penalty for delayed payment of bills so long as such penalty is reasonable and not exhorbitant. 64 Am.Jur.2d: Public Utilities § 56. Black's Law Dictionary defines a penalty as "an agreement to pay a greater sum, to secure payment of a less sum . . . By what name it is called is immaterial. Because a penalty is functionally and definitionally equivalent to interest, it is our opinion that it would be to the advantage of all concerned parties to use KRS 360.010, which is essentially a policy statement as to what is a permissible interest charge, as a guide to determine what amount of penalty shall be exacted. If, in the opinion of the Morehead Utility Plant Board, a 6% penalty plus a service charge reflecting those costs incurred in carrying the overdue account would provide incentive to its customers to pay their bills on time, then, it is our opinion it would be to the advantage of the Board and its customers to utilize this method in the computation of its service charge and penalty.