Did Kentucky's special-purpose-entity reporting and audit law apply to municipal TVA power distributors?

Plain-English summary

Kentucky's Attorney General concluded in 2013 that municipal utilities incorporated under the Little TVA Act generally fell within the state's new special-purpose-entity law. They met the definition of a special purpose governmental entity and had to make the annual reports required by KRS 65A.020, even though the bill creating Chapter 65A had not expressly amended the Little TVA Act.

The opinion drew a different line for audits. Little TVA Act utilities already had an annual audit requirement under KRS 96.840. The AG concluded that this existing rule controlled over Chapter 65A's audit frequency and standards, while the utility still had to submit its audit for publication on the state registry. It also said the utility could continue audits under the federal standards required by its TVA contract. More generally, federal TVA law and authorized TVA contract terms preempted conflicting state requirements.

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 a municipal TVA distributor have to file Chapter 65A's annual report?

The AG said yes. It found that Little TVA Act utilities fit Chapter 65A's definition of a special purpose governmental entity, and it read the reporting requirement as additional to existing filings.

Did Chapter 65A replace the utility's annual audit rule?

No. The opinion applied the existing KRS 96.840 annual-audit requirement instead of Chapter 65A's audit frequency and standards. It still required submission of the audit for publication on the registry.

Could a state rule override a conflicting TVA power contract?

The AG said authorized TVA contract terms preempted conflicting state rules. It found no audit-standard conflict in the arrangement it described because KRS 96.840, rather than Chapter 65A's standards, governed the utility's audits.

Background and statutory framework

Representative Brent Yonts asked whether 2013 House Bill 1's KRS Chapter 65A applied to utilities distributing Tennessee Valley Authority power, including the Hopkinsville Electric System. The AG read KRS 65A.010(8) to include those utilities and KRS 65A.020 to require annual reports. For audits, it read Chapter 65A's more-stringent-existing-law provision with KRS 96.840 and KRS 65A.030(2)(c): the older annual audit duty remained, and the audit went to the registry. The opinion also relied on 16 U.S.C. § 831i for TVA contract authority and described federal preemption of conflicting state requirements.

Citations and references

Statutes: KRS 65A.010(8); KRS 65A.020; KRS 65A.030(2)(c); KRS 96.840; 16 U.S.C. § 831i.

Case cited: City of Middlesboro v. Kentucky Utilities Co., 146 S.W.2d 48, 52 (Ky. 1940), quoted in the opinion's TVA contract discussion.

Source

• Landing page: https://www.ag.ky.gov/Resources/Opinions/Pages/Opinions.aspx
• Original Word document: https://www.ag.ky.gov/Resources/Opinions/Opinions/OAG13-012.doc

Original opinion text

OAG 13-012

December 20, 2013

Subject: Whether the requirements of KRS Chapter 65A apply to utilities incorporated under the Little TVA Act.

Requested by: Rep. Brent Yonts

Written by: Matt James

Syllabus: The requirements of KRS Chapter 65A generally apply to utilities incorporated under the Little TVA Act, although the auditing requirements of KRS 65A.030 do not. Contracts with the TVA preempt any conflicting state laws.

Statutes construed: KRS 65A.010; KRS 65A.020; KRS 65A.030; KRS 96.560; KRS 96.840

OAGs cited: OAG 77-78; OAG 80-63

Opinion of the Attorney General

Rep. Brent Yonts has requested an opinion of this office on whether House Bill 1 (2013) (“H.B. 1”), which created KRS Chapter 65A, applies to utilities that are distributors for the Tennessee Valley Authority (“TVA”), such as the Hopkinsville Electric System. At the request of this office, the TVA, Kentucky League of Cities, and Auditor of Public Accounts have provided their analyses. We advise that the requirements of KRS Chapter 65A generally apply to utilities incorporated under the “Little TVA Act,” KRS 96.550, et seq., although the auditing requirements of KRS 65A.030 do not. Contracts with the TVA preempt any conflicting state laws.

In enacting H.B. 1, the legislature found that “for many years it has been impossible to compile a complete and accurate list of all the special purpose governmental entities operating in the Commonwealth, or to ascertain basic information about how those entities are operated, where they receive their funding, and how they expend their resources.” 2013 Ky. Acts 198. The legislature intended “to improve the public accountability and transparency of all special purpose governmental entities in the Commonwealth, for the benefit of the people whom these entities serve.” Id. The purpose of H.B. 1 is thus to improve accountability and transparency among the variety of governmental agencies in the Commonwealth.

In general terms, H.B. 1 creates KRS Chapter 65A, which creates a registry of “special purpose governmental entities” and imposes reporting and auditing requirements on them. A special purpose governmental entity is defined as follows:

“Special purpose governmental entity” or “entity” means any agency, authority, or entity created or authorized by statute which:

1. Exercises less than statewide jurisdiction;

2. Exists for the purpose of providing one (1) or a limited number of services or functions;

3. Is governed by a board, council, commission, committee, authority, or corporation with policy-making authority that is separate from the state and the governing body of the city, county, or cities and counties in which it operates; and

4. a. Has the independent authority to generate public funds; or

b. May receive and expend public funds, grants, awards, or

appropriations from the state, from any agency, or authority of the state, from a city or county, or from any other special purpose governmental entity.

KRS 65A.010(8)(a). KRS 65A.010(8)(c) provides a non-exclusive list of examples of special purpose governmental entities, and KRS 65A.010(8)(d) provides a list of entities that are exempt from the definition. The central provisions of KRS Chapter 65A are KRS 65A.020, which requires all special purpose governmental entities to annually submit detailed financial reports to the Department for Local Government (“DLG”), and KRS 65A.030, which requires attestation engagements or audits either every four years or annually, depending upon the total income or expenditures of the entity. Other provisions detail penalties for noncompliance and require annual adoption and publication of budgets. The remainder of H.B. 1 amends dozens of other chapters to require specific entities to submit to the requirements of KRS Chapter 65A. Notably however, it does not amend the Little TVA Act.

At issue is whether the provisions of KRS Chapter 65A apply to utilities that are distributors for the TVA, such as the Hopkinsville Electric System. The TVA itself is created and regulated by 16 U.S.C. § 831 et seq. Kentucky utilities are authorized to purchase and distribute electricity from the TVA under Kentucky’s Little TVA Act, KRS 96.550 et seq. KRS 96.560(3) expressly authorizes municipalities “to contract with and acquire from the Tennessee Valley Authority or any governmental agency electric power or current for resale.” KRS 96.560(4) provides that “it hereby is declared to be the further legislative intent that KRS 96.550 to 96.900 shall be the complete law of this state . . . with respect to the operation of electric plants acquired by any municipality after June 1, 1942; and that all laws and parts of laws in conflict herewith, to the extent of such conflict, hereby are repealed.” Another relevant provision for this specific issue is KRS 96.840, which provides that “an audit of the board's records shall be made annually by an auditor selected by the legislative body of the municipality.” The issue thus presents three distinct questions: 1) are entities incorporated under the Little TVA Act special purpose governmental entities subject to the reporting and auditing requirements of KRS Chapter 65A; 2) if so, do the provisions of KRS Chapter 65A conflict with the Little TVA Act; and 3) are the requirements of KRS Chapter 65A preempted by federal law whenever they conflict?

Regarding whether entities incorporated under the Little TVA Act are subject to the reporting and auditing requirements of KRS Chapter 65A, KRS 65A.010(8) provides that a special purpose governmental entity is any entity that has less than statewide jurisdiction, provides limited functions, is governed by a board separate from other local government units, and may independently generate funds or expend funds received from other entities. Utilities incorporated under the Little TVA Act meet all of these criteria, and thus fit within the definition of a special purpose governmental entity. Although H.B. 1 did not expressly amend the Little TVA Act, “the legislature is presumed to be aware of existing law when it enacts a statute.” Tilley v. Tilley, 947 S.W.2d 63, 66 (Ky. Ct. App. 1997). “When the application of two statutes leads to an apparent conflict, this Court has a duty, to the extent possible, to harmonize the statutes and give force and effect to each.” Mitchell v. University of Kentucky, 366 S.W.3d 895, 900 (Ky. 2012). Therefore, we must give effect to both statutes where possible, and utilities incorporated under the Little TVA Act are generally subject to any applicable requirements of KRS Chapter 65.

KRS 96.560(4) does provide “that KRS 96.550 to 96.900 shall be the complete law of this state with respect to municipalities acquiring electric plants.” However, we have previously advised that “other statutory provisions exist concerning the acquisition and operation of electric plants by cities and, thus, the ‘T.V.A. Act’ is not the complete law of the state.” OAG 77-78. In OAG 80-63, we further advised that utilities incorporated under the Little TVA Act were subject to the Model Procurement Code, on the grounds that “there is no language indicating that the General Assembly intended for the exclusivity to operate indefinitely into the future in such manner as to bar any subsequent and conflicting legislation . . . the minute and specific treatment must control.” Our prior opinions have advised that the exclusivity provision of KRS 96.560(4) does not operate as a complete bar to subsequent legislation in areas that are different from that established by the Little TVA Act, and we follow those opinions here.

Given that utilities meet the definition of special purpose governmental entities, the next issue is to determine whether KRS Chapter 65A and the Little TVA Act are consistent with each other. KRS Chapter 65A consists mainly of two requirements: a requirement to annually report certain information to the DLG in KRS 65A.020, and an auditing requirement in KRS 65A.030. KRS 65A.020(2)(c) provides that “the provisions of this subsection shall be in addition to, and shall not supplant or replace any reporting or filing requirements established by other provisions of the Kentucky Revised Statutes.” KRS 65A.020(2)(c) thus expressly provides that its reporting requirements are in addition to any other reporting requirements in other statutes, and so any special purpose governmental entity, including TVA distributors, is subject to them.

Regarding audits however, KRS 65A.030(2)(f) provides:

If a special purpose governmental entity is required by another provision of law to audit its funds more frequently or more stringently than is required by this section, the special purpose governmental entity shall comply with the provisions of that law, and shall comply with the requirements of paragraph (c) of this subsection.

KRS 65A.030(2)(c) provides that “the special purpose governmental entity shall submit for publication on the registry the audit or attestation engagement, in the form and format required by the DLG.” KRS 65A.030(2)(c) and (f) thus provide that if an entity is already subject to more frequent or stringent auditing requirements, the entity shall follow those auditing requirements instead of those in KRS 65A.030, with the addition that the entity must submit the audit for publication on the registry. KRS 96.840 already expressly requires annual audits for any utility incorporated under the Little TVA Act. KRS 65A.030(1) requires attestation engagements or audits every four years, unless the entity receives or expends more than $500,000, in which case it must be audited annually. The auditing requirements of KRS 96.840 are thus either at least as frequent and stringent or more frequent and stringent than those required by KRS 65A.030, and so the auditing requirements of KRS 96.840 control over those in KRS 65A.030. The utility must only submit those audits for publication on the registry pursuant to KRS 65A.030(2)(c) and (f). Thus there does not appear to be any direct conflict between the auditing provisions of KRS Chapter 65A and the Little TVA Act. KRS Chapter 65A imposes some additional reporting requirements on utilities incorporated under the Little TVA Act, but does not substantially alter their auditing requirements under existing state law.

Since KRS Chapter 65A does not alter the auditing requirements of utilities incorporated under the Little TVA Act, it avoids conflict with federal law in at least the area of auditing requirements. TVA contracts with distributors require the use of Federal Energy Regulatory Commission (“FERC”) uniform standards, while KRS 65A.030(2)(d) requires conforming to “generally accepted governmental auditing or attestation standards” and “generally accepted auditing or attestation standards.” Thus if utilities incorporated under the Little TVA Act were required to follow the auditing requirements of KRS 65A.030, they would effectively be required to perform audits under two separate standards. However, as argued above, utilities incorporated under the Little TVA Act are not required to use the accounting standards of KRS 65A.030, as KRS 96.840 controls. Utilities incorporated under the Little TVA Act may continue to conduct audits in accordance with FERC standards.

As a general matter however, contracts with the TVA preempt state law whenever they conflict. 16 U.S.C. § 831i provides that the TVA “is authorized to include in any contract for the sale of power such terms and conditions . . . and to provide for such rules and regulations as in its judgment may be necessary or desirable.” The TVA has express authority in federal law to include anything it deems necessary in its contracts. This express contractual authority preempts any conflicting state regulations. The “Tennessee Valley Authority . . . is not subject to the jurisdiction of the state courts. It is free from the state's regulation or control . . . the legislature . . . could not change the statute in any way that would impair the obligation of the contract.” City of Middlesboro v. Kentucky Utilities Co., 146 S.W.2d 48, 52 (Ky. 1940); see also McCarthy v. Middle Tennessee Elec. Membership Corp., 466 F.3d 399, 407 (6th Cir. 2006) (“the terms and conditions of TVA's power contracts . . . are part of TVA's unreviewable rate-making responsibilities . . . To the extent that Tennessee law imposes additional constraints on the TVA's authority, it is preempted by the TVA Act's express grant of discretion”). Thus to the extent that any requirement in KRS Chapter 65A conflicts with anything in 16 U.S.C. § 831 et seq., or any contract authorized under those provisions, such requirements are preempted.

In summary, a utility incorporated under the Little TVA Act is generally subject to the provisions of KRS Chapter 65A. It must perform the annual reporting required by KRS 65A.020, but is subject to the auditing requirements of KRS 96.840 and not those of KRS 65A.030. Federal law pertaining to the TVA and contracts with the TVA preempt any conflicting state law.

JACK CONWAY

ATTORNEY GENERAL

Matt James

Assistant Attorney General