Request By:
Hon. Alison Lobb Milby
Walker and Milby, P.S.C.
P.O. Box 486
214 North Second Street
Richmond, Kentucky 40475
Opinion
Opinion By: Steven L. Beshear, Attorney General; By: Sylvia L. Lovely, Assistant Attorney General
You requested by letter dated April 6, 1983 that we render an opinion regarding the following issue:
What rate of interest should be paid by municipalities on service deposits? In computing the interest rate amount, is it sufficient to pay interest on the deposit only, or must interest be paid also on previously accrued interest? (i.e., is the rate a simple rate, or must there be compounding? )
First of all, OAG 60-432 states that municipally owned utilities must pay interest on deposits the same as public utilities pursuant to KRS § 278.460. ( See Union Light, Heat & Power Co., et al. v. Mulligan, et al., Ky., 197 SW 1081, 1085 (1917) for its pre KRS Chapter 278 discussion on the principle of paying interest on utility deposits. ) However, KRS § 278.460 provides no guidance to a utility as to whether the interest to be paid is simple or is to be compounded. The statute simply states that "Public utilities . . . shall pay interest at six percent (6%) annually on amounts required to be deposited."
While the utility is permitted to require a deposit from its customers for its protection, it is manifestly clear that for the time period the Company holds that deposit, the customer must be compensated by way of interest, the deposit representing a debt. Union Light, Heat & Power Company, 197 SW 1081, 1085.
It has been held that a deposit being held by a utility shall be likened to a demand note. Commonwealth v. Kentucky Power & Light Co., Ky., 77 SW 2d 395, 396 (1934). Since KRS § 278.460 requires that 6 percent interest be paid annually, interest would be accrued on an annual basis. As stated in Commonwealth v. Kentucky Power & Light Co., 77 SW 2d 395, 396:
At common law the rule is that in the absence of contractual provisions to the contrary, interest is due and payable at the time the principle is due.
Thus, in the event that this annual interest is not remitted to the customer, and assuming the deposit is kept longer than one year, each yearly accrual of interest would become the property of the customer, in addition to the deposit, and a requirement would arise that interest accrue to that new debt as well as to the deposit itself. In short, compounding would be the logical result. As stated in McWilliams v. Northwestern Mut. Life Ins. Co., Ky., 147 SW 2d 79, 81 (1941):
where a note expresses the date interest is to be paid, and if the interest is not paid when it matures, then such interest becomes an independent debt and itself bears interest until paid.