Original Author: Hemsley, Sid
Date of Material: 08/21/1996
Reviewed Date: 04/22/2021
MTAS was asked whether the city's gas system can contribute revenues for the repair of the city's streets.
Your question is: Can the city's gas system contribute revenues for the repair of the city’s streets. The answer is probably no, except on a case-by-case basis where the utility has a legal obligation to repair a street cut or excavation, or to make other repairs to the city's streets arising from the utility’s use of the streets.
STATUTORY AUTHORITY UNDER WHICH GAS SYSTEM ESTABLISHED.
Tennessee Code Annotated, section 7-35-406 authorizes cities owning a gas system to confer upon the board of waterworks and sewer commissioners the jurisdiction over the gas system. Section 19-102 of your municipal code provides that the city's gas system is placed under the control of the city's board of waterworks and sewer commissioners, and that it will be subject to all the provisions prescribed by Tennessee Code Annotated, sections 7-35-401 through 7-35-432.
Some statutes or charter provisions under which municipal utilities are established contain a detailed list of the purposes for which utility revenues can be spent; Tennessee Code Annotated, section 7-35-401 et seq. does not. However, Tennessee Code Annotated, section 7-35-414 gives the board of waterworks and sewer commissioners the authority to establish water and sewer rates and charges, and declares that:
Such rates and charges shall be adjusted so as to provide funds sufficient to pay all reasonable expenses of operation, repair, and maintenance, provide for a sinking fund for payment of principal and interest of bonds when due, and maintain an adequate depreciation account....
Presumably, where the board of water and sewer commissioners operates the gas system that statute also applies to the establishment of gas rates and charges.
AUTHORITY OF UTILITIES TO EXPEND FUNDS FOR MUNICIPAL PURPOSES.
In Killion v. City of Paris, 241 S.W.2d 524, 527 (1951), the Tennessee Supreme Court declared that it "agrees with the majority view and holds that in the absence of statutory prohibition a municipality may divert its profits from the sale of water to its customers to municipal purposes other than those of the water works enterprise." But the Court noted that the plaintiff, who objected to surplus revenues generated by the sale of water being used to retire the city's bonded indebtedness, did not cite the statute under which the water system was organized. One of the statutes under which water departments could have been organized specifically limited the use of water revenues to certain purposes. The Court pointed to that statute and declared, "If acquired under the statute mentioned the surplus must be used in the improvements, extensions or additions to the system.... But if otherwise acquired a different rule may apply as to the disposition of the surplus." [At 526.]
The statute to which the Court pointed was Williams Code, sections 3695-14 and 3695-15, which ultimately became Tennessee Code Annotated, sections 7-35-417 and 7-35-418. Those provisions respectively required any surplus in the operation and maintenance account in excess of one year operating and maintenance costs to be transferred to the depreciation account, and any funds in the depreciation account to be expended in balancing depreciation or in making new construction, extensions or additions to the system, and were repealed by Public Acts 1988, Chapter 750.
However, Killion undoubtedly applies to all municipal utility systems and stands for the proposition that in the absence of a statutory prohibition a utility can spend surplus revenues for municipal purposes other than directly on the utility system, but that if a statute prescribes how the utility's revenues can be spent (and if the plaintiff is smart enough to cite the statute) the court's will apply it.
TENNESSEE CODE ANNOTATED, SECTION 7-35-414.
Arguably, Tennessee Code Annotated, section 7-35-414 still limits the purposes for which funds from utilities organized under Tennessee Code Annotated, section 7-35-401 et seq. can be spent: (1) on reasonable expenses of operation; (2), repair and maintenance; (3) sinking fund; and (4) depreciation account.
Under that argument the gas system would have to show that funds spent on the improvement and repair of city streets fit into categories (1) and (2). Clearly, funds spent to repair utility cuts and excavations, etc., are either reasonable expenses of operation or repair or maintenance, but I think the utility would face an uphill battle arguing that funds spent on general street maintenance and repair fit into either of those two categories.
TENNESSEE CODE ANNOTATED, SECTION 7-34-115.
In addition, such utility contributions face another barrier: a recent amendment to Tennessee Code Annotated, sections 7-34-115 by Public Acts 1993, Chapter 509. That statute provides that:
Notwithstanding the provisions of any other law to the contrary as a matter of public policy, municipal utility systems shall be operated on sound business principles as self-sufficient entities. User charges, rates and fees shall reflect the actual cost of providing the services rendered. No public works shall operate for gain or profit or as a source of revenue to a governmental entity, but shall operate for the use and benefit of the consumers served by such public works and for the improvement of the health and safety of the inhabitants of the area served.... [Emphasis is mine.]
The same statute goes on to declare for what purposes "any municipality shall devote all revenues derived from a public works":
(1) The payment of all operating expenses;
(2) Bond interest and retirement and/or sinking fund payments;
(3) The acquisition and improvement of public works;
(5) The payment of other obligations incurred in the operation and maintenance of the public works and the furnishing of services;
(6) The redemption and purchase of bonds, in which case such bonds shall be canceled;
(7) The creation and maintenance of a cash working fund;
(8) The payment to the municipality of a certain amount of equity invested from the general fund;
(9) If the governing body of the municipality by resolution so requests, the payment to the municipality of a certain amount of in lieu of taxes.
The city has an argument that section 7-34-115 applies only to utilities operated under the Revenue Bond Law. [See Nashville Elec. Service v. Luna, 185 Tenn. 175, 204 S.W.2d 529 (Tenn. 1947).] However, I am convinced the clear intention of the General Assembly was that that statute apply to all municipal utility systems, and that whoever drafted it simply amended the wrong section of the Tennessee Code to accomplish that purpose. For that reason I think that the funds contributed from the city's utility system to generally maintain and repair city streets would have to fit into one of the above categories. The only categories for which an argument could be made are (1), (3) and (5). However, I doubt that the General Assembly ever contemplated that any of those categories include contributions for general street maintenance and repair.
There are a significant number of cases that deal with the question of what constitutes a utility operating and maintenance or repair expense. [See 64 Am. Jur., Public Utilities, sections 173--188.] The repair of street cuts and excavations is included in those categories, but I have been unable to find any cases dealing with that question from the perspective of general street maintenance and repairs.
However, the question of whether utility systems of various types can contribute to charitable, civic and educational organizations and charge the contributions to operational expense has arisen a surprising number of times in the United States, but not in Tennessee. [See 59 ALR3d 941]. The majority of cases appear to allow such contributions. However, a significant minority of them do not, usually on the ground that such contributions function as involuntary contributions on the part of ratepayers. Most of the cases involve investor-owned utilities and the question of whether the cost of charitable contributions should be an operational cost borne by the ratepayers, or a cost charged against the profits of such utilities and borne by the stockholders. While these cases probably cannot be read very far with respect to the question of whether a utility can contribute money to the city for general street maintenance and repair, I think that Tennessee Code Annotated, section 7-34-115, standing by itself, acts as a formidable barrier to such an expansive definition of operating and maintenance and repair expenses.
Many bond covenants cite the statutory authority under which a particular utility is organized, and at least some contain a list of purposes for which utility revenues can be spent. The courts will enforce bond covenants where they are not otherwise illegal or unconstitutional. I do not know what, if any, bond covenants regulate the purposes for which the city's gas system revenues can be spent. The utility should check those before any decision is made to make a contribution to the city for any reason.
Sidney D. Hemsley
Senior Law Consultant