Request By:
Louis M. Waller, Esq.
139 W. Fourth Street
Russellville, Kentucky 42276
Opinion
Opinion By: Robert F. Stephens, Attorney General; By: Thomas R. Emerson, Assistant Attorney General
This is in reply to your letter raising a question concerning the garbage pickup service in the city of Adairville. In 1971 the city advertised for a garbage pickup service and Russellville Sanitation Company was the low bidder. That Company was awarded the contract at the price of $2.25 per month per residential unit for garbage pickup and disposal services for a five-year period with an option to renew for an additional five years. The contract has been renewed.
In August of 1978 the company proposed to increase to $4.00 per month the fee per residential unit for garbage pickup and disposal services, asserting that inflation was devouring the company's profits. In your opinion, if an increase is to be granted, it may be necessary to advertise the contract so that others who might be interested would have an opportunity to offer the same service at a competitive price.
Your question is whether the city can amend the existing contract (without advertising for bids pursuant to KRS 424.260) and permit the company to collect $4.00 per month, rather than $2.25 per month, per residential unit for garbage pickup and disposal services.
The contract does contain a provision that, "This contract may be revised and/or modified by mutual agreement of the parties hereto as same may become necessary from time to time due to change of circumstances." The contract also states that the city advertised for and received bids for the pickup and disposal of garbage and the Russellville Sanitation Company submitted the lowest bid of $2.25 per month per residential unit for such services. The contract was awarded to the company on the basis of its low bid of $2.25 per month per residential unit. In addition, as far as we can determine, the company wants to increase the monthly fee per residential unit without furnishing any additional services to city residents and its basic reason for increasing the charges is because of inflation.
Basically, the situation you have presented involves a franchise agreement between the city and the Russellville Sanitation Company which is governed by Section 164 of the Kentucky Constitution. That section provides:
"No county, city, town, taxing district or other municipality shall be authorized or permitted to grant any franchise or privilege, or make any contract in reference thereto for a term exceeding twenty years. Before granting such franchise or privilege for a term of years, such municipality shall first, after due advertisement, receive bids therefor publicly, and award the same to the highest and best bidder; but it shall have the right to reject and or all bids. This section shall not apply to a trunk railway."
In OAG 79-175, copy enclosed, we said that it would be legal to amend the rate charges of a franchise ordinance by mutual agreement. A franchise is, of course, a contract, the terms of which are not subject to alteration without the consent of both parties unless the right of alteration has been reserved in the franchise itself. Section 164 of the Kentucky Constitution, governing the term of franchises and their advertisement for bids, prohibits an enlargement of the franchise but contains no restrictions on amending rate charges and regulatory provisions contained in utility franchises in order for the utility to receive a fair return and to continue the service.
In Lutes v. Fayette Home Telephone Co., 155 Ky. 555, 160 S.W. 179 (1913), the Court held that a city may generally modify a contract with the consent of the other party; the modification in this case was valid and the ordinance fixing a new rate was not void and, cities are not deprived of the right to change a franchise contract as to rates by Section 164 of the Kentucky Constitution.
In Johnson County Gas Co. v. Stafford, 198 Ky. 208, 248 S.W. 515 (1923), the Court said that a city through its legislative body might during the life of the franchise contract change the scale of prices previously set by it and the utility. A citizen of such city has no vested right in such scale of charges so agreed upon and the changing of same is wholly a matter of contract between the legislative body of the city and the utility. Furthermore, the prohibition in Section 164 of the Kentucky Constitution is against the granting of a franchise or making a contract for a term exceeding twenty years and against granting a franchise without advertisement or public sale. There is no inhibition expressed or implied against entering into a contract or amendatory contract except that it shall not be for a term exceeding twenty years. In addition, the Court stated that changing of the rates does not amount to the granting of a new franchise.
The Johnson County Gas Co. case, supra, was cited with approval in Russell v. Kentucky Utilities Co., 231 Ky. 820, 2 S.W.2d 289 (1929); City of Covington v. Union Light, Heat & Power Co., 243 Ky. 591, 49 S.W.2d 580 (1932); Southern Bell Telephone & Telegraph Co. v. City of Louisville, 265 Ky. 286, 96 S.W.2d 695 (1936); Scott v. Cincinnati, N. & C. Ry. Co., 268 Ky. 383, 105 S.W.2d 169 (1937); Union Light, Heat & Power Co. v. City of Covington, 282 Ky. 558, 139 S.W.2d 64 (1940).
Thus, the city and the garbage pickup and disposal service company may by mutual agreement amend the rate structure contained in the existing franchise agreement, even where no other consideration than that of securing the advantage and convenience to citizens of the city of the continuance of a needed public service is involved, as an amendment changing rates is not construed as creating a new franchise subject to the bidding requirements of Section 164 of the Kentucky Constitution.