Request By:
Ms. Laura L. Murrell
Murrell and Johnson
P.O. Box 397
316 Wilkinson Street
Frankfort, Kentucky 40602
Opinion
Opinion By: Steven L. Beshear, Attorney General; By: Charles W. Runyan, Assistant Deputy Attorney General
In 1964, the Pendleton County Water District constructed a gas system pursuant to KRS 74.401. Now it wishes to sell the gas system. You stated the factual background as follows:
The water division and the gas division have been operated separately with separata bond issues and competely separate financial records. All common employees and expenses have been allocated between the divisions. The gas division has incurred losses for the past several years and has undertaken construction of additions without obtaining financing for the needed capital. The net result is a very large past due bill to their supplier, Columbia Gas Transmission.
We represent the Pendleton County Water District and have been involved in exploration of ways to deal with this outstanding balance since last summer. It has finally been concluded that the best alternative is to sell the system to a Kentucky gas company who will take the system without any rate increase until the entire company files an increase. This company has system-wide rates, and its rates compare favorably with those the district is presently charging and very favorably with those the district would have to charge to liquidate this debt. Negotiations are presently under way with the gas company.
As you say, KRS Chapter 74 does not expressly or explicitly treat the subject of how to sell an acquired gas system. Your question is how must the water district go about the disposal of the gas system?
As you point out, KRS 74.405 does not deal explicitly with the sale of a gas system; however, the statute provides in part that the water district commissioners shall have all the powers and authority, as regards the gas distributing system, that are conferred upon them for the purpose of furnishing a water supply under KRS 74.010 to 74.390.
However, you feel that KRS 74.110 offers the best answer. We agree. That statute reads:
The territorial limits of an established water district may be enlarged or diminished in the following way:
(1) The commission shall file a petition with the county judge/executive describing the territory to be annexed or stricken off, and setting out the reasons therefor.
(2) Notice of the petition shall be given, Within thirty (30) days after the notice, any resident of the water district or the territory proposed to be annexed may file objections and exceptions.
(3) The county judge/executive shall set the matter for hearing, and if the county judge/executive finds that it is reasonably necessary, he shall enter an order annexing or striking off the proposed territory. If the county judge/executive finds that the proposed change is unnecessary, he shall dismiss the petition. Either party may appeal the order to the circuit court.
(4) If any of the territory stricken off has been assessed to pay the costs of any improvements, the commission shall strike the assessments from the assessment roll and refund to the respective owners any assessments collected on the land which have been stricken off.
(5) If a deficit is incurred by striking off part of a water district, or by striking assessments from the assessment roll, so that the assessment roll is insufficient to pay the bonded indebtedness of the district, the deficit shall be paid out of the general fund of the district, realized from all other resources in the district.
You say that the sale of the gas system would diminish the territorial limits of the district, since the area served by the gas operation is larger than the area served with water. However, the water service would in no way be diminished. We believe the sale of the gas system can be sufficiently adjusted to fit the procedural steps outlined in KRS 74.110.
The case of Valla v. Preston Street Road Water District #1, Ky., 395 S.W.2d 772 (1965), involved the sale of the entire assets, including all facilities, of Water District No. 1 of Jefferson County to the Louisville Water Company. As Judge Palmore, for the court, wrote, there is no statute providing in so many words for the "dissolution" of such water district corporation. However, the court ruled that the dissolution and sale of assets of the water district could be properly effected under a reasonable construction of KRS 74.110, and that the county court (presently the county judge executive) had the authority to dissolve a water district. The court observed that under KRS 74.110 the territorial diminution of a water district could be exercised to the point of nothingness. The court added this:
And if so, surely a corporate dissolution would be no more than a normal, reasonable and necessary concomitant of such authority. We are not disposed to believe that the legislature ever intended or would intend the empty effigy of a corporate creature to be strung up throughout eternity on the end of an aimless technicality.
Thus the court in Valla, above, specifically held that KRS 74.110 does authorize and prescribe the procedure for dissolution if and when it is incident to a substantially complete territorial diminution. The court wrote this at page 774, in connection with the sale aspects of dissolution:
The occasion for a complete territorial diminution of a water district once established as a going concern probably could never arise except in connection with or following a disposition of all its assets and an assumption or satisfaction of its liabilities. Under the contract in question all the assets of Preston District will be transferred to the city or the water company, and the water company will assume its liabilities (all of which, other than current items, are payable solely from future revenues).
It was contended that the water district had no power to engage in the contract of sale. The court struck that down by saying:
KRS 74.070 empowers its governing body to "make contracts for the water district with municipalities for a water supply * * * and do all acts necessary to carry on the work." The district has no reason for existence but to secure for and to its patrons a water supply and distribution system. Preston District now purchases 90% of its water supply from the water company. The contract by which the city-owned water company agrees to assume the district's function guarantees continued service and will result at once in annual savings of $200,000 to the district's customers. In our opinion it comes within the purpose and purview of the authority granted by KRS 74.070.
In response to the argument that the water district contract is an abuse of discretion, being an allegedly bad bargain, the court wrote this at page 776:
No court should, and this court will not, commit the folly of matching business acumen with the thoroughly competent and informed individuals who planned and recommended the project in behalf of the city and water company and whose judgment appears to be so clearly supported by the evidence.
It is our view that the Valla case authorizes by the strongest implication the sale of the subject gas system under the procedure of KRS 74.110. As was said in
Newbolt v. Board of Education, etc., Ky., 409 S.W.2d 513 (1966), it is an established rule of statutory construction that the courts will consider the purpose which the statute is intended to accomplish, and will not give a strict, literal construction to the statute if it would lead to an unreasonable or absurd conclusion. Moreover, under Valla, above, an express power includes those powers as are necessarily or fairly implied in, or incident to, the accomplishment of the things which are expressly authorized to be done. See also
Long v. Mayo, 271 Ky. 192, 111 S.W.2d 633 (1937) 637.
In connection with the sale, we feel that at least two experts should appraise the assets and facilities of the gas system, and that the sale be for no less than the established appraised value. Note that in Valla, above, the court in that regard wrote: "According to expert testimony they will be a prudent investment at the contract price."
Although only the gas service will be discontinued, the implications of KRS 74.367 and 74.361 suggest that final approval of the Public Service Commission should be sought. Also see KRS 278.010(4)(a)(gas) and (5)(a)(water) relating to energy and non-energy utilities, KRS 278.015 (water district subject to P.S.C. jurisdiction), and KRS 278.040 (jurisdiction of energy and non-energy utilities).