Officials of the DeKalb Utility District are turning to the Chancery Court for relief from what they call an unreasonable water rate imposed on the utility by the City of Smithville.
The lawsuit, brought against the city by attorneys Dewey Branstetter, Jr. and Keith Blair for the DUD, was filed Friday in DeKalb County Chancery Court.
The DUD is asking the Chancellor to find that the city’s new water rate to the utility of $5.00 per thousand gallons, which went into effect January 1st, is unreasonable; that the rate be set at $2.25 per thousand gallons, which the DUD believes is the actual cost of providing water services; that the city be enjoined (prohibited) from charging any rate to the DUD in excess of $2.67 per thousand while this litigation is pending; and that the city be enjoined (prohibited) from disconnecting the DUD from its water system while this lawsuit is pending. The DUD also wants the court to order a speedy hearing on this action for a declaratory judgment and to advance it on the court’s calendar.
The Court is being asked by the DUD to enter a temporary injunction while this litigation is pending and a permanent injunction. “The rate of $5.00 per thousand gallons charged by the City to the DUD effective January 1, 2014 has caused and will continue to result in immediate and irreparable injury, loss, and damage to the DUD and its customers. The issuance of the temporary injunction will not cause undue inconvenience or loss to the City of Smithville, but will prevent irreparable injury to the DUD,” according to the lawsuit.
Although the city has never threatened to cut off service, DUD officials are concerned about Section 18-504 of the Smithville City Code which authorizes the Water Department of the City of Smithville to cut off and discontinue water services to the DeKalb Utility District if the water bill is not paid within seven days after the District receives the bill.
DUD further asserts that “if allowed to continue to charge the $5.00 per thousand rate, the City of Smithville stands to make a profit of several hundred thousand dollars, which is contrary to (state) laws applicable to Smithville”. State law provides that “rates and fees of municipal utility systems 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 government entity, but shall operate for the use and benefit of the customers served by such public works”.
In addition to raising the rate to an excessive and unreasonable level, the DUD claims the City of Smithville also violated Section 18-502 of the Smithville City Code, which requires the City of Smithville to give the DeKalb Utility District 30 days’ notice in advance of a rate change. The City of Smithville, however, gave the DeKalb Utility District only 16 days’ actual notice in advance of the rate change.
(CLICK PDF LINK BELOW TO READ ENTIRE TEXT OF LAWSUIT)
Complaint – DUD vs. City of Smithville 2 7 14.pdf (7.08 MB)
The essential text of the lawsuit is as follows:
The DeKalb Utility District brings this action to challenge the December 12, 2013 decision of the Board of Aldermen of the City of Smithville to increase the water rate that it charges DeKalb Utility District by 144%, effective January 1, 2014.
As a result of the rate increase, DUD has had to increase the rates that it charges its approximately 4,987 customers by at least 42%, effective as of the January, 2014 billing cycle.
DUD seeks a declaration from the court that the new rate charged by the City is unreasonable.
In addition, DUD seeks a decision from the court (a) ordering the City of Smithville to charge a reasonable rate to the DUD; (b) ordering the City to charge a rate to the DUD that reflects the actual cost of providing the services rendered; (c) finding that a rate of $2.25 per thousand gallons for the DUD reflects the actual cost of providing the services rendered; (d) enjoining the City from charging the DUD a rate in excess of $2.67 per thousand gallons during the pendency of this litigation; and (e) enjoining the City from disconnecting the DUD from its water system during the pendency of this litigation.
DUD is a wholesale water customer of the City. At present, approximately 66% of the water produced by the City is purchased by the DUD. In calendar year 2013, the DUD purchased 308,722,000 gallons of water from the City. Under a Water Purchase Contract dated March 15, 2004, the City agreed to furnish the DUD with water at an initial rate of $1.60 per thousand gallons. The 2004 Water Purchase Contract provided for annual rate increases and other rate adjustments. The 2004 Water Purchase Contract terminated on January 1, 2014. In planning for the termination of the 2004 Water Purchase Contract, in May of 2012 the Board of Commissioners of the DUD voted to approve the construction of a water treatment plant with a target completion date of early 2014. When the DUD builds its own water plant, it will have its own water supply; and it will not be dependent upon the City for water.
Unfortunately, the plans for the water treatment plant came to an abrupt halt in July of 2012 when a petition purportedly brought by the “Ratepayers of the DUD” was filed before the Tennessee Utility Management Review Board (UMRB). The petition was the product of efforts by an entity hired by the City, the Calvert Street Group, to stop the construction of the DeKalb water treatment plant, and to do so by any and all means. As enticement for getting other DUD customers to sign the petition, the Calvert Street Group offered petition circulators a prize for collecting the most signatures. The ratepayer petition filed against the DUD proceeded to a contested case hearing before the UMRB on April 4, 2013.
In the UMRB hearing, Hunter Hendrixson, the Secretary-Treasurer for the City of Smithville, testified that the City had paid the Calvert Street Group $5,000 per month, plus expenses and has an agreement to pay the Calvert Street Group a $25,000 bonus if it stops the DUD from building its water treatment plant. As of March of 2013, before the UMRB hearing, the City had paid the Calvert Street Group in excess of $78,000, not including legal fees to the attorneys representing the “ratepayers” in UMRB proceedings. At the conclusion of the April 4, 2013 UMRB hearing, the UMRB denied the petitioners’ request for relief, meaning the City lost. The petitioners filed a petition for Judicial Review, which is currently pending before the Chancery Court of Davidson County, and a decision is expected within the next 30 days. At the time of the termination of the 2004 Water Purchase Contract, the City was charging the District a rate of $2.05 per thousand gallons.
On December 12, 2013 the Board of Aldermen and the Mayor of the City held a special board meeting to decide on a new water rate for the DUD beginning January 1, 2014. In the December 12, 2013 meeting, as reflected in the “Minutes of Special Called Board Meeting” Alderman Danny Washer made a motion to charge the DUD $7.50 per thousand gallons of water. This motion was subsequently withdrawn. Following the withdrawal of Alderman Washer’s motion, Alderman Jason Murphy made a motion to charge the DUD $5.00 per thousand gallons and revisit this rate for the 2014-15 budget beginning in July 2014, The Board of Aldermen voted unanimously to charge this rate beginning January 1, 2014 and to revisit the rate in the next fiscal budget. The Mayor approved the action of the Board of Aldermen. The City notified the DUD of the rate change by letter dated Friday, December 13, 2013 which letter the DUD received when its office opened for business on Monday, December 16, 2013. The first bill reflecting the new rate of $5.00 per thousand gallons is anticipated to be received by the middle of February, 2014 and will be due to be paid shortly thereafter.
In calendar year, 2013, the DUD purchased 308,722,000 gallons of water from the City. Based upon the contractual rate of $2.05 per thousand gallons, the DUD paid approximately $632,880 for the water purchased from the City. By the way of comparison, if the DUD purchases the same amount of water from the City in 2014, at the rate of $5.00 per thousand, the cost will soar from $632,880 to $1,543,610, an increase of $910,000.
In March of 2013, the City contracted with Warren and Associates Engineering PLLC to perform a study to determine the City’s costs to treat and supply one thousand gallons of water (The Warren Study). Information provided in the Study was to be utilized “by the City to determine their actual production costs for supplying water to their citizens and to their wholesale water customers”. The Warren Study concluded that the average cost to the City to treat and supply 1,000 gallons of water is $2.67. In reaching its conclusion on the average cost, the Warren Study considered the last five years of the City’s Audits, which are filed with the Office of the Tennessee Comptroller of the Treasury, and noted that the City’s water and sewer departments currently have no debt. Upon information and belief, the City does not have any anticipated maintenance on its water system because of recent (2011) updates to the raw water intake and water treatment plant. Jerry Warren, a professional engineer and the owner of Warren and Associates Engineering, PLLC, testified regarding the study in the April 4, 2013 UMRB hearing. In his sworn testimony at the UMRB hearing, Warren said that because there would be no transportation costs for providing this water to the District, that the $2.67 rate could be reduced by as much as 42 cents per thousand gallons, for a rate of $2.25 per thousand gallons.
Based upon the Warren Study, the new rate that the City is charging the DUD is unreasonable because it is at approximately two times the actual cost of providing the services rendered. Charging an excessive and unreasonable rate is contrary to the public policy governing municipal utility systems as declared in Tennessee Code Annotated 9-21-308 and Tennessee Code Annotated 7-34-115.
Under TCA 9-21-308, state law specifies in pertinent part in section (e) “Notwithstanding any other law to the contrary, as a matter of public policy, public works projects financed under this chapter 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. Public works shall not operate for gain or profit or as a source of revenue to a government entity, but shall operate for the use and benefit of the customers served by such public works and for the improvement of the health and safety of the inhabitants of the area served”.
Under TCA 7-34-115, state law provides in pertinent part in section (a) ” Notwithstanding 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”.
The lawsuit states that ” If allowed to continue to charge the $5.00 per thousand rate, the City stands to make a profit of several hundred thousand dollars, which is contrary to the (state) law applicable to Smithville. According to the most recent audit report issued by the City of Smithville, the City Water and Sewer Department had a change in net position of approximately $15,000 in 2013. In addition, for the fiscal year ending on June 30, 2103, the Smithville Water and Sewer Department has cash and cash equivalents on hand of $2,336,722, an increase of $396,122 since July 1, 2012. In 2012, the Smithville Water and Sewer Department had operating income in excess of $100,000. The audit reports for the City are a matter of public record and are posted on the Tennessee Comptroller’s website.
As a consequence, DUD seeks a declaration from the Court that the new rate adopted by the City on December 12 is unreasonable. In addition to raising the rate to an excessive and unreasonable rate, the City of Smithville also violated Section 18-502 of the Smithville City Code, which requires the City to give the DUD 30 days’ notice in advance of a rate change. The City, however, gave the DUD only 16 days actual notice in advance of the rate change.
Section 18-504 of the Smithville City Code authorizes the Water Department of the City to cut off and discontinue water services to the DUD if the water bill is not paid within seven days after the DUD receives the bill.
Pursuant to TCA 29-14-110, a decree ordering further relief is necessary and proper.
Under the circumstances of this case, further relief includes, but is not limited to a decision from this Court (a) ordering the City of Smithville to charge a reasonable rate to the DeKalb Utility District; (b) ordering the City to charge a rate to the DUD that reflects the actual cost of providing the services rendered; (c) finding that a rate of $2.25 per thousand gallons for the DUD reflects the actual cost of providing the services rendered; (d) enjoining the City from charging the DUD a rate in excess of $2.67 per thousand gallons during the pendency of this litigation; and (e) enjoining the City from disconnecting the DUD from its water system during the pendency of this litigation.
DUD requests that the Court order a speedy hearing on this action for a declaratory judgment and advance it on the Court’s calendar.
The DUD requests the Court enter a temporary injunction during the pendency of this action and a permanent injunction, which: Restrains and enjoins the City from charging the DUD a rate of $5.00 per thousand gallons; Restrains and enjoins the City from charging the DUD a rate in excess of $2.67 per thousand gallons during the pendency of this litigation; and Restrains and enjoins the City from disconnecting the DUD from its water system during the pendency of this litigation.
The rate of $5.00 per thousand gallons charged by the City to the DUD effective January 1, 2014 has caused and will continue to result in immediate and irreparable injury, loss, and damage to the DUD and its customers.
The issuance of the temporary injunction will not cause undue inconvenience or loss to the City of Smithville, but will prevent irreparable injury to the DUD.”
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