Could a Kentucky city keep or refund surplus money from its electric utility?

Plain-English summary

Kentucky's Attorney General concluded in 2013 that a city operating an electric utility could direct the use of genuine surplus funds by ordinance. The Olive Hill mayor had asked about an overpayment from the city's power supplier and whether it had to be refunded or could support system upgrades or future environmental costs. The AG said refunds, upgrades, and an escrow for those future costs were permissible uses if the city adopted an ordinance. If it did not, the surplus had to go into the city treasury for general government purposes.

The opinion stressed what counted as surplus. The city first had to account for the utility's operating, maintenance, sinking fund, and other costs. It cited a Kentucky court decision rejecting the withdrawal of utility revenue before those needs were covered, and an earlier AG opinion warning that rates could not be raised merely to generate general-fund money.

Currency note

This opinion was issued in 2013. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

Did Olive Hill have to refund the utility overpayment to customers?

The AG said a refund was a permissible, perhaps favored, use of genuine surplus funds if the city provided for it by ordinance. It did not say a refund was mandatory.

Could the city reserve surplus money for electric-system upgrades or future environmental costs?

The opinion said those uses could be specified by ordinance. It first required the money to be genuinely surplus after utility costs were accounted for.

What happened to the surplus without an ordinance?

Under the statute the AG analyzed, it had to be paid into the city treasury for general government purposes.

Background and statutory framework

Olive Hill's power supplier had reported an overpayment after an annual true-up. The AG applied KRS 96.200, which allowed a city to specify by ordinance how profits, earnings, or surplus from a city utility would be used and provided a default for the treasury when no ordinance existed. The opinion read Electric Plant Bd. of City of Mayfield v. City of Mayfield as requiring operating, maintenance, and sinking-fund needs to be covered before utility revenue became surplus.

Citations and references

Statute: KRS 96.200.

Case: Electric Plant Bd. of City of Mayfield v. City of Mayfield, 185 S.W.2d 411 (Ky. 1945).

Source

• Landing page: https://www.ag.ky.gov/Resources/Opinions/Pages/Opinions.aspx
• Original Word document: https://www.ag.ky.gov/Resources/Opinions/Opinions/OAG13-011.doc

Original opinion text

OAG 13-011

September 6, 2013

Subject: How a city that operates its own electric utility may utilize surplus funds from that utility

Requested by: Hon. Kenny Fankell

Mayor, City of Olive Hill

Written by: Matt James

Syllabus: A city may by ordinance specify how to utilize utility funds that are surplus after accounting for all utility costs. Until such an ordinance is passed, the surplus funds shall be paid into the city treasury.

Statutes construed: KRS 96.200

OAGs cited: OAG 78-656; OAG 80-110

Opinion of the Attorney General

Hon. Kenny Fankell, Mayor of Olive Hill, has requested an opinion of this office regarding how a city that operates a utility may utilize surplus funds from that utility. We advise that a city may by ordinance specify how to utilize surplus funds. Until such an ordinance is passed, the surplus funds shall be deposited in the general fund of the city for general purposes.

Mayor Fankell informs us that Olive Hill operates its own electric system and purchases power from American Electric Power. Annually, American Electric Power compares the money paid by Olive Hill for electricity to the actual cost of the electricity, in what is known as a “true-up.” Historically, the cost of the electricity has exceeded the money paid by the city, resulting in additional charges to the city. However, this year, decreasing utility costs resulted in an overpayment of $172,000 by the city. Mayor Fankell has specifically asked whether the overpayment must be returned to the city’s customers, or may be used by the city to upgrade its electric system or hold the funds in escrow for future environmental compliance costs.

KRS 96.200 provides:

. . . the legislative body of any city of the third through sixth classes inclusive may, by ordinance, provide in what manner and for what purpose any profits, earnings or surplus funds arising from the operation of any public utility owned or operated by the city may be used and expended . . . Until such an ordinance is enacted any surplus earnings shall be paid into the city treasury, to be expended for the general purposes of government in the city.

KRS 96.200 thus provides that a city may by ordinance specify how to use surplus utility funds. Until such an ordinance is passed, the surplus funds are to be paid into the city treasury and to be expended for general government purposes.

Although KRS 96.200 allows for payment of surplus funds into the city treasury for general purposes, “surplus” has been very narrowly construed. In Electric Plant Bd. of City of Mayfield v. City of Mayfield, 185 S.W.2d 411 (Ky. 1945), the court directly addressed how to interpret KRS 96.200. It held that “the City of Mayfield has the authority to, as it did by ordinance, direct that the surplus, over and above the operating and maintenance costs and statutory sinking fund requirements, be paid into the general fund of the city.” Id. at 413. However, it interpreted “surplus” very narrowly, finding that “it is obvious, from reading the Statutes hereinbefore referred to, that the city has no right to withdraw any sum of money from the revenues of the water plant until first funds sufficient in amount to cover operating, maintenance, and sinking fund requirements shall have been set aside.” Id. The court held that although cities have the authority to deposit surplus utility funds into the general fund, the funds must truly be surplus, meaning operating, maintenance, and any other costs for the utility must first be accounted for before any surplus utility funds are paid into the city treasury.

In OAG 78-656, we followed the guidelines in City of Mayfield:

the rates should be sufficient to cover all operating and maintenance costs and statutory sinking fund requirements . . . If after applying these concepts a profit results from the operation of the city's water system, such surplus may, following the appropriate procedures, be used to supplement the general fund. However, rates cannot be raised, excluding these principles, merely to generate more money for the city's general fund.

Id. While we followed the guidelines of City of Mayfield, we further added that a city may not use a utility simply to generate more money for the city’s general fund.

KRS 96.200 and City of Mayfield provide that a city may by ordinance specify how to deal with surplus utility funds, but until that ordinance is passed, the funds shall be deposited in the general fund. In order to truly be surplus funds, all utility expenses should be paid for before any funds are deposited into the general fund. Regarding the specific questions asked by Mayor Fankell, a city may by ordinance elect to return the surplus funds to customers as a refund. In another context, we advised that “there does appear to be authority for refunding any excess tax payments by benefited property owners back to the property owners.” OAG 80-110 (citing 14 Mcquillin Mun. Corp. § 38.336). Returning surplus utility finds to customers is thus a permissible and perhaps favored method of using surplus utility funds, and a city may by ordinance do so. It may also by ordinance use those funds to upgrade its utility system or hold them in escrow for future environmental compliance costs. While the city may pass no ordinance and pay the surplus funds into the treasury, given the narrow construction of surplus funds and the potential for misuse in the general fund, prescribing the use of the surplus funds by ordinance seems preferred.

In summary, a city that operates a utility may by ordinance specify how to use utility funds that are surplus after accounting for all utility costs. Until it passes such an ordinance, such surplus funds are to be paid into the city treasury.

JACK CONWAY

ATTORNEY GENERAL

Matt James

Attorney General