Exclusive Franchises for Sewer Treatment Services

You have posed a question as to whether your Town has the requisite authority to grant an exclusive franchise for sewer treatment service in accordance with its municipal Ordinance No. 00-13. A franchise is defined as “the grant of a right or privilege by the sovereign power usually with respect to streets or highways primarily to enable the grantee to perform a public service or benefit....” Johnson City v. Milligan Utility District, 276 S.W.2d 748 (Ct. App. 1954); Nashville Water Co. v Dunlap, 138 S.W.2d 424 (1940). It appears that the basic legal inquiry involved in this analysis is whether such a grant would constitute an illegal or unconstitutional monopoly (Tenn. Const. Const. Art. 1, ' 22). In my opinion, there is sufficient authority for the Town to grant an exclusive franchise for sewer service to one entity.

The United State Supreme Court has held that the Sherman Antitrust Act, 15 U.S.C.A. ' 2; applies to municipalities because, unlike the states, they are not sovereign entities. See Lafayette v. Louisiana Power Co., 435 U.S. 389 (1978). However, the Court also declared that a municipality can “assume” the state's immunity from the prohibitions of the Sherman Antitrust Act by demonstrating that its monopoly activity is authorized by the state "pursuant to state policy to displace competition with regulation or monopoly public service" and is not violative of the Act. Town of Hallie v. City of Eau Claire, 441 U.S. 1713 (1985). In other words, there must be a statute or constitutional provision that permits a regulated monopoly (a monopoly that is not unconstitutional) for it to be pass judicial scrutiny.

Your City is chartered under the general law mayor-aldermanic charter, codified at T.C.A. '' 6-1-101 et seq. Among the general powers granted to cities established and operating under that charter are powers relative to city streets and to sewer systems. T.C.A. ' 6-2-201 permits cities to:

(12). Grant to any person, firm, association or corporation (including the municipality) franchise for public utilities and public services to be furnished the municipality and those therein. The power to grant franchises embraces the power to grant exclusive franchises. (emphasis added). Whenever an exclusive franchise is granted, it shall be exclusive not only as against any other person, firm or corporation, but also against the municipality itself. Franchises may be granted for a period of twenty-five (25) years or less, but not longer. The Board may prescribe in each grant of a franchise, the rates, fares, charges and regulations that may be made by the grantee of the franchises in accordance with state and federal law. Franchises may by their terms apply to the territory within the corporate limits of the municipality at the date of the franchises, and as the corporate limits may be enlarged, and to the existing streets, alleys and thoroughfares that thereafter may be opened. T.C.A. ' 6-2-201(12).

(13). Make contracts with any person, firm, association or corporation for public utilities, public services to be furnished the municipality and those therein...T.C.A. ' 6-2-201(13).

(14). Prescribe reasonable regulations regarding the construction, maintenance, equipment, operation and service of public utilities, compel reasonable extensions of facilities for these services, and assess fees for the use of or impact upon these services. Nothing herein shall be construed to permit the alteration or impairment of any of the terms or conditions of any exclusive franchises granted or of any exclusive contract entered into under subdivisions (12) and (13). *** As a caveat, it should be noted that the Ordinance No. 00-13 states in the preamble that On-Site Systems, Inc. is a “public utility” which operates under the authority of the Tennessee Regulatory Authority. And, as set forth in T.C.A.' 65-4-107:

No privilege or franchise...granted to any public utility by the state of Tennessee or by any political subdivision thereof shall be valid until approved by the Tennessee Regulatory Authority, such approval to be given when the Authority determines that such franchise is necessary and proper for the public convenience and properly conserves the public interest.

The Authority’s jurisdiction and control over public utilities is described in T.C.A. ' 65-4- 104:

The authority has general supervisory and regulatory power, jurisdiction, and control over all public utilities, and also over their property, property rights, facilities, and franchises, so far as may be necessary for the purpose of carrying out the provisions of this chapter.... T.C.A. ' 65-4-104. . Thus the Tennessee Regulatory Authority retains the general supervisory powers granted to it in title 65, chapters 4 and 5, of the Tennessee Code to oversee all aspects of the operation of public utilities in Tennessee, including the express authority under T.C.A. ' 65-5-201 et seq., to regulate rates. It is also authorized to regulate most privately-owned utilities providing service in Tennessee. T.C.A. ' 6-2- 201(12).

In addition, a public utility may appeal to the TRA from any order or regulation made by any local, municipal, or county governing body. T.C.A. ' 65-4-108.

In summary, it appears permissible for the Town to grant an exclusive franchise for sewer treatment services. And, the TRA has virtually plenary power over most aspects of the utility. See Op. Tenn. Atty. Gen. No. 97-114 (August 14, 1997)[because the Tennessee Regulatory Authority retains all general supervisory power over the rates charged by public utilities, the local government cannot alter or interfere with the rates set by the Tennessee Regulatory Authority. The Tennessee Regulatory Authority has power to set aside the county's rates and retains ultimate power over all rates charged].

With respect to exclusivity, Part 2 of chapter 4, T.C.A. ' 65-4-201 et seq., provides that no public utility may establish, construct or operate any line or system in an area already receiving a like service from another public utility "without first having obtained" from the Authority a certificate that the present or future public convenience and necessity require such service. T.C.A. ' 65-4-203 sets forth the conditions for the Authority's issuance of such a certificate. The Authority may hold a public hearing as to the propriety of the issuance of any such certificate. See T.C.A. ' 65-4-204. A special provision is made for the involvement of local governments. T.C.A. ' 65-4-207 provides that the "provisions of [T.C.A.' 65-4-201 et seq. do not apply where any municipality or county by resolution or ordinance declares that a public necessity requires a competing company" in that area. Thus, in instances in which a municipality has determined that there is a need for a competing company, the Authority is not required to issue the certificate of public necessity otherwise required by T.C.A. ' 65- 4-201 et seq. Any such locally granted franchise, however, remains subject to the Authority's general supervisory powers.

Please let me know if you have any further questions in this regard.