Request By:
James S. Wilson, Esq.
226 Main Street
Paris, Kentucky 40361
Opinion
Opinion By: Robert F. Stephens, Attorney General; By: Thomas R. Emerson, Assistant Attorney General
This is in reply to your letter in which you, as the city attorney for the city of North Middletown, raise several questions concerning a problem encountered by the city. The city has its own distribution system for natural gas. It purchases natural gas under a continuing contract from Columbia Gas Transmission Company at an agreed wholesale price and distributes it to its own customers at a retail price.
Within the last year the city has had problems with the gas system because of leakage. It has been buying more natural gas than it has been selling. Through the use of grants and benefits from the state and federal governments the city has been able to repair and reconstruct portions of its gas lines. In 1978, because of a break in one of its main lines, a large volume of gas was apparently lost during two summer months when sales were low. Due to difficulty and delay in getting the line repaired the city found itself owing about $20,000 for the natural gas that had escaped.
The city and the gas supplier have agreed that the money in question will be paid in monthly installments over a period of not more than one year. In order to raise the money the city had to either raise the gas rates or to impose a surcharge. The city has apparently decided to raise the money by imposing a fixed monthly surcharge on each present customer measured by the average monthly consumption of such customer or his predecessor in ownership of the property during 1978.
In your opinion the surcharge is legal but it should be measured by consumption. You have concluded that it should be set up as a fixed monthly amount measured by consumption during the previous year during which the leakage occurred. Some of the customers of the gas company have questioned the proposed proceedings and you have asked the opinion of this office on several points.
Your first two questions ask whether the proposed surcharge is legal and, if it is not, whether there is another legal way to impose a surcharge, such as a percentage surcharge measured by a customer's current consumption.
As stated in 38 C.J.S. Gas § 31:
"The power to fix rates can never be exercised arbitrarily, but only after an impartial and thorough investigation into all the facts with the ultimate object of doing justice both to the gas company and to the public."
In 38 C.J.S. Gas § 32, in connection with a municipality's power to regulate a gas utility, the following appears:
". . . The power to fix rates generally includes the power to fix any rate which is not against public policy, or which does not deprive the utility of a just return on its investment. It includes not only the power to establish a maximum rate, but also the power to prevent rate competition below that figure, and power to prohibit the lowering of rates directly or indirectly by any device which a gas company may adopt. It also includes any authority that may be fairly implied as incidental to, or reasonably necessary for, the effectiveness of the power expressly given. . . ."
Furthermore, in connection with the city's authority to increase the rates of a public utility in the city, see Johnson County Gas Co. v. Stafford, 198 Ky. 208, 248 S.W. 515 (1923) and Central Kentucky Natural Gas Co. v. City of Mt. Sterling, 32 F.2d 338 (E.D.Ky. 1928).
From the limited factual situation you have presented, two things seem clear. First, whether the proposed increase is considered an increase in gas rates or a surcharge, the fact remains that customers of the gas utility will pay more for the gas they receive. Second, the increase is due to the leakage in the city's gas system.
Gas rates must, of course, be just and reasonable, both to the utility and to the public. Various elements are considered in figuring the permitted rate and among them are operating expenses. Included in operating expenses is unaccounted for gas; leakage (the difference between the amount of gas introduced into the gas system and the amount actually delivered). In 38 C.J.S. Gas § 33 (p. 687), the following appears:
"Since there is a certain loss of gas through leakage, condensation, expansion, or contraction, no matter how carefully the business is conducted, in fixing rates, allowance must be made for this unaccounted for gas as an operating expense. A gas company, however, will not be permitted to include negligent or wasteful losses among its operating charges."
In Arkansas Louisiana Gas Co. v. City of Texarkana, Ark., 96 F.2d 179 (8th Cir.1938), the Court concluded that an allowance for leakage of gas in the distribution system of ten percent was reasonable. See also Coffeyville Gas & Fuel Co. v. Public Utilities Commission, Kan., 225 P. 1036 (1924). Furthermore, in Hardin-Wyandot Lighting Co. v. Public Utilities Commission, Ohio, 140 N.E. 779 (1923) and City of Lima v. Public Utilities Commission, Ohio, 140 N.E. 147 (1922), allowances for leakages of gas of thirteen and fifteen percent were considered reasonable.
It is our understanding that the Kentucky Energy Regulatory Commission (formerly the Public Service Commission) now allows for leakage of gas in the amount of five percent. While a municipal utility is not subject to the jurisdiction of the Energy Regulatory Commission, the activities of a city in the operation of its utility system may be reviewed by the courts to test whether such actions are clearly, palpably and grossly unreasonable, City of Mt. Vernon v. Banks, Ky., 380 S.W.2d 268 (1964). We do not know what your leakage rate was but we have serious doubts as to whether the courts would permit the city to require the customers of its gas system to shoulder the entire burden of the gas loss due to leakage, particularly where the loss due to leakage exceeds a reasonable amount (the amount allowed by the Energy Regulatory Commission). It should be noted that the city is subject to the standards and requirements established by the Federal Office of Pipeline Safety in Atlanta, Georgia.
Your third question asks whether the surcharge may be added to all utility bills, including bills to users of city water and sewer services who are not served by the city's gas system.
If some type of increase is properly added to the city's rate for gas service that increase or surcharge cannot be added to the bills of those persons who do not use the city's gas system. In McQuillin Mun. Corp. (3rd Ed.), Vol. 12, § 35.37, the author states that a municipality has been held to lack authority to make charges against nonusers within the area served by the municipal utility for the adequate operation of the system and to insure the security of the bonds issued and sold therefor. See also City of Maysville v. Coughlin, Ky., 399 S.W.2d 297 (1966), where the Court said that owners of property not served by a city utility were not subject to a charge by that utility.
Your last question asks whether the city may disconnect all its utility services, including sewage and water services, as well as gas service, when a customer fails to pay his utility bill, including the gas surcharge, or whether the city must separate the gas bill from the other utilities, and cut off only the gas service of a customer who fails to pay for that particular service.
In Cassidy v. City of Bowling Green, Ky., 368 S.W.2d 318 (1963), the Court considered the question of whether a city could enforce the collection of its garbage disposal charges by discontinuance of its water services. The Court said water service, sewerage service and garbage disposal service are all inter-related and it is reasonable to discontinue one public service for failure to pay for a related public service. Furthermore, in 60 ALR3d 714, the general rule is stated to be that a public utility corporation cannot refuse to render the service which it is authorized to furnish, because of some collateral matter or independent transaction.
Thus, in our opinion, the city may not legally disconnect all its utility services, including sewage and water services, as well as gas service, when a customer fails to pay for municipal gas service. The city cannot cut off a service provided by it to one of its residents for his failure to pay for another unrelated service provided by the city.