Request By:
Thomas G. Alig, Jr., Esq.
115-117 Park Place
Covington, Kentucky 41011
Opinion
Opinion By: Steven L. Beshear, Attorney General; By: Thomas R. Emerson, Assistant Attorney General
This is in reply to your letter concerning the city of Ludlow's water contract which was entered into in 1966 with the city of Covington and which was assumed in 1979 by the Kenton County Water District # 1 when it took over the water system from the city of Covington. The city of Ludlow questions the legality of the contract.
The contract provides that the parties agree to a twenty-year water contract with water to be provided at the rate of 17.4 cents per 100 cubic feet. It appears that hearings have been held before the Utility Regulatory Commission and the Water District was granted a rate increase which increased the water rates charged by the Water District to the city of Ludlow.
You informed city officials that under KRS 278.200 the Utility Regulatory Commission has the authority to change water rates for the Water District. The city, nevertheless, requests an opinion from this office as to the legality of the contract and the effect of the increased water rates upon the other terms and conditions of the contract.
KRS 278.200 provides as follows:
"The commission having jurisdiction over the affected utility may, under the provisions of this chapter, originate, establish, change, promulgate and enforce any rate or service standard of any utility that has been or may be fixed by any contract, franchise or agreement between the utility and any city, and all rights, privileges and obligations arising out of such contract, franchise or agreement, regulating any such rate or service standard, shall be subject to the jurisdiction and supervision of the commission, but no such rate or service standard shall be changed, nor any contract, franchise or agreement affecting it abrogated or changed, until a hearing has been had before the commission in the manner prescribed in this chapter."
Pursuant to KRS 278.015, a water district is classified as a non-energy utility and it shall be subject to the jurisdiction of the utility regulatory commission in the same manner and to the same extent as any other non-energy utility as defined in KRS 278.010. A non-energy utility is defined in KRS 278.010(5)(a) as any person except a city who owns, controls, operates or manages a facility used or to be used for or in connection with the distributing or furnishing of water to or for the public, for compensation. Thus, a water district is subject to the jurisdiction of the utility regulatory commission and its contract or agreement with a city may be changed by the commission in connection with any rate or service standard that may have been fixed by such contract or agreement.
In 73 C.J.S. Public Utilities, Sect. 16b the following appears:
"Any contract relating to public utility rates must yield to the regulatory power of the state unless excepted therefrom by constitutional or statutory provision, and an unexpired contract does not authorize or compel a utility to charge a rate different from that established by the state; but the contract is obligatory on the parties until abrogated by the state."
Furthermore, the above-mentioned authority goes on to state in the same section that every such contract is conclusively deemed to be made with knowledge and in contemplation of the sovereign power of the state to alter it. Thus, no argument can be made that state regulation impairs the obligation of contract or deprives the contracting parties of property without due process of law. Such a contract is voidable only in that it cannot stand against modification by competent authority.
We also direct your attention to 73 C.J.S. Public Utilities, Sect. 41b(2) where it is stated:
"Unless otherwise provided by constitution or statute, a general grant of power to regulate rates authorizes a public utility commission to regulate or modify rates fixed by contract, including those specified in franchise agreements, even though such contracts or agreements were executed prior to the passage of the statute by which the power is conferred, since they must be deemed to have been made subject to the police power of the state."
In
Southern Bell Telephone & Tel. Co. v. City of Louisville, 265 Ky. 286, 96 S.W.2d 695, 697 (1936), the Court said:
"The power conferred upon municipalities to enter into contracts fixing rates in the first instance for public utility service does not deprive the state of its right to exercise its police power of regulating rates. The authority to regulate rates of public utilities is primarily a legislative function of the state, and the right is essentially a police power. "
The Court concluded in
Fern Lake Company v. Public Service Commission, Ky., 357 S.W.2d 701 (1962), that the commission has the authority to change rates upon a proper showing and that its power to do so cannot be limited by contractual provisions. See also Peoples Gas Co. of Kentucky v. City of Barbourville, 291Ky. 805, 165 S.W.2d 567 (1942) and
Louisville Water Company v. Public Service Commission, Ky., 318 S.W.2d 537 (1958).
In conclusion, it is our opinion that a water district is subject to the jurisdiction of the utility regulatory commission and its contract or agreement with a city may be changed by the commission, pursuant to KRS 278.200, in connection with any rate or service standard that may have been established by such contract or agreement. The commission's power to regulate rates authorizes it to change or modify rates fixed by contract and its power to do so cannot be limited by provisions in the contract between the regulated utility and the city. Generally such a contract is voidable only in that it cannot stand against a properly enacted modification of the commission.