Request By:
Byron Lee Hobgood, Esq.
City Attorney
City of Madisonville
P.O. Box 195
Madisonville, Kentucky 42431
Opinion
Opinion By: Robert F. Stephens, Attorney General; By: Thomas R. Emerson, Assistant Attorney General
This is in reply to your letter stating that the city sells electric power to consumers within the city and in connection therewith it charges a deposit equal to one month's bill. These funds have been kept in a separate account. They have not been invested nor have they been commingled with the city's other funds. Your specific question is whether the city may invest the money it holds as deposits from consumers of the electric system and whether the money may be spent for the city's use.
We start with the generally recognized principle that a public utility may require a deposit from its customers, provided it is reasonable and is not discriminatory. See 64 Am.Jur. 2d Public Utilities, § 46 and 43 A.L.R. 2d 1262, 1264.
Next, we direct your attention to OAG 77-353, copy enclosed, citing the case of
Commonwealth v. Kentucky Power & Light Co., 257 Ky. 66, 77 S.W.2d 395 (1934), where the court construed essentially the present provisions of KRS 278.460 as requiring the public utility company to refund the service deposit with interest when the customer ceases to be a patron. The statute, requiring the public utility to pay interest on deposits required of patrons, is not applicable to municipally owned utilities under the terms of KRS 278.010(3). However, the court in the Kentucky Power & Light Co. case, supra, at page 396 of its opinion said in part:
". . . In arriving at what the Legislature intended by this act, we must remember that the deposit of the customer was subject at all times to a demand by the customer for its return. The customer, of course, would in that contingency have to cease to be a patron of the company or make other arrangements about securing his bill. The deposit being subject to this demand for its return at all times, it partook of the nature of a demand loan. In the case of
Union Light, Heat & Power Co. v. Mulligan, 177 Ky. 662, 197 S.W. 1081, this court held that if a public service company requires a deposit as here it must pay interest thereon. . . ."
Thus, as we said in OAG 77-353, although there is no specific statute requiring municipally owned utilities to refund service deposits with interest, it would appear that such deposits must be refunded with interest under the general principles cited in
Commonwealth v. Kentucky Power & Light Co., 257 Ky. 66, 77 S.W.2d 395 (1934), provided it is not necessary to use the deposits to cover delinquent accounts at the time service is discontinued. See also OAG 77-477, copy enclosed, at page one.
As to the status of the service deposits while they are in the possession of the utility company, the following appears in 64 Am.Jur. 2d, Public Utilities, § 46:
"The making of deposits by customers does not result in a trust relation as between the utility and its customers, but only in the relationship of debtor and creditor. A deposit is a demand loan, and therefore a utility is not required to make annual payments of interest to the depositors except upon request."
In the case of
State v. Atlantic City Electric Co., 23 N.J. 259, 128 A 2d 861 (1957), the court said that where a power companywas required to pay a fixed rate of interest on money deposited by its customers to secure the power company against nonpayment of charges for services rendered, and the power company had, without objection, long engaged in the practice of commingling the deposits with its general funds, the relationship between the power company and its consumer depositors was that of debtor and creditor.
At page 865 of its opinion the court said:
"Probably the most important determinative of whether a debtor-creditor, as opposed to an informal trust, relationship is created lies in the provision for the payment or nonpayment of interest. Where the recipient of money obligates himself to pay a fixed rate of interest, regardless of whether the money is invested and without reference to the rate of return which it yields, it is only reasonable to expect, unless a contrary intention is clearly manifested by some other circumstance, that the recipient is to have the beneficial as well as the legal interest. Presumably a debt, involving only a personal obligation to repay the amount received at the proper time, is established. When a fixed rate of interest is paid, as here, there is a strong inference that the payee is entitled to use the money to suit his own convenience. . . ."
The court went on to state that the electric company was directed to pay interest at the rate of four per cent without reference to its use of the funds or to the existing market conditions. This alone, while not controlling, is strongly persuasive that the intent was to create a debt rather than a fiduciary responsibility. Finally, at page 867 of its opinion in the Atlantic City Electric Co. case, supra, the court said:
"For the reasons already recited, prominent amongst which are the payment of a fixed rate of interest and the practice long continued without objection of commingling deposits with general funds, we believe the relationship sub judice was that of debtor and creditor. The individual consumer was not to retain any beneficial interest in the money deposited, the security arrangement obviously being solely for the benefit of the company. It accepted deposits without restriction as to use, incurring thereby the obligation of paying four per cent per annum. We can find here none of the circumstances which ordinarily engender the conclusion that a relationship embodying special confidence was intended. . . ."
While a municipal utility may require a reasonable and nondiscriminatory service deposit from its customers, it must pay interest on the deposit and must refund the deposit with interest when the customer ceases to be a patron of the utility, when so requested by the customer, provided it is not necessary to use the deposit to cover a delinquent account. The making of a deposit by a customer of a municipal utility on which a fixed rate of interest must be paid creates a debtor and creditor relationship between the utility and the consumer-depositor and in absence of an express provision restricting the utility's use of the funds so deposited, the utility may use the money to suit its own convenience although the funds deposited take the form of a demand loan at all times.