Can a Tennessee utility district charge a 'growth and development fee' or 'impact fee' on new construction, and what makes such a charge a legal fee instead of an illegal tax?

Subject

Opinion No. 12-11, "Growth and Development Fees" and "Impact Fees" Levied by Local Utilities, February 3, 2012

Plain-English summary

Senator Tracy asked the AG five questions about water and sewer fees charged by two different kinds of Tennessee utilities: the Consolidated Utility District of Rutherford County, formed under the 1937 Utility District Law, and Columbia Power & Water Systems (CPWS), governed by the 1935 Municipal Electric Plant Law. The questions probed whether so-called "growth and development fees" and "impact fees" were lawful and refundable, and whether utility districts have any tax authority hiding inside their fee power.

Different statutes, different worlds. Tenn. Code Ann. § 7-82-107 says the 1937 Utility District Law is "complete in itself" for the utility districts it covers. The 1935 Electric Plant Law, by its own terms, applies only to "municipalities" (county or city governments) that operate electric plants and have appointed a board of public utilities. The two statutes do not cross over: a 1937-Law utility district is not subject to the Electric Plant Law's rules. State v. Marshall (Tenn. 2010) supports treating separate statutory schemes as separate.

Rate-setting rules. A 1937-Law district must set "reasonable" rates that keep the system self-supporting, including reserves and debt service. Tenn. Code Ann. § 7-82-403. A municipal water utility operated by a public utilities board under the Electric Plant Law continues to be governed by whatever statutory scheme created the water system (often the Revenue Bond Law, Tenn. Code Ann. § 7-34-114, and related provisions).

Fee versus tax. The constitutional line is whether the charge is paid into general revenue (a tax) or used to defray the cost of a specific service to the fee payer (a fee). City of Tullahoma v. Bedford County (Tenn. 1997); Memphis Natural Gas Co. v. McCanless (Tenn. 1946). Utility districts have no taxing authority. Tenn. Code Ann. § 7-82-301(a)(1)(A). So a growth-and-development fee survives as a "fee" only if the proceeds are used exclusively to operate or expand the system for the benefit of the party paying.

Equal protection. Different rate classifications among utility customers must bear a rational relationship to a legitimate state interest. Tucker Corp. v. City of Clarksville (Tenn. Ct. App. 2003).

Applied to the specific districts:

• Rutherford County's Consolidated Utility District. The fees charged since 1996 are presumed reasonable, and the AG found no information showing they were used for anything other than service-related capital costs. Refund: not required. The district's customers have administrative remedies (Tenn. Utility Management Review Board) and statutory protest procedures (§ 7-82-401(d), § 7-82-402(a)(1)) if they want to challenge specific rates.
• Columbia Power & Water Systems. Columbia's water impact fees are expressly authorized by 1994 Tenn. Priv. Acts 194 and are kept in a separate fund used solely for water system capital improvements. Authorized. No refund.
• Tax-like fees by utility districts. A 1937-Law utility district has no power to levy a tax. If a charge were really a disguised general-revenue tax, it would be unauthorized. The AG saw no evidence of that here.

Currency note

This opinion was issued in 2012. 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.

The Tucker Corp. opinion the AG relied on is an unreported intermediate appellate decision. Tennessee Supreme Court rule on citation of unpublished opinions and the substantive Tennessee impact-fee doctrine have continued to evolve. Pull current authority before relying on the "fee versus tax" analysis.

Background and statutory framework

Utility District Law of 1937 (Tenn. Code Ann. §§ 7-82-101 to -804). A utility district is a perpetual public corporation with no taxing power but authority to charge reasonable fees for services it provides. Its scheme is "complete in itself," and other utility statutes do not impose additional rules on it.

Municipal Electric Plant Law of 1935 (Tenn. Code Ann. §§ 7-52-101 to -611). Authorizes a city or county to appoint a board of public utilities to operate its electric plant. The municipality may transfer its existing waterworks, sewerage, or gas system to that board. The board takes the system subject to the system's own existing statutory regime.

The fee-versus-tax line. A fee defrays the cost of a regulatory program or the cost of a service provided to the fee payer. City of Tullahoma. A tax raises general revenue. The dispositive question is whether the money goes into general revenue (tax) or a service-related fund (fee).

Columbia's specific authority. 1994 Tenn. Priv. Acts 194 gave Columbia explicit authority to impose water impact fees on new development and required that the fees be kept in a separate fund and used only for water system capital improvements. The fee is preserved against state-law preemption by Tenn. Code Ann. § 67-4-2913.

Customer remedies. Rate challenges can run through the Tennessee Utility Management Review Board under Tenn. Code Ann. §§ 7-81-102(a), 7-82-702. Customers can file a protest within thirty days of published rates under § 7-82-402(a)(1), with judicial review by common-law writ of certiorari.

Common questions

Q: Is a "growth and development fee" or "impact fee" legal in Tennessee?
A: Yes, if the proceeds are used exclusively to operate or expand the system for the benefit of the people paying and the structure does not function as a tax (general-revenue) measure.

Q: My utility district just added a new "system development charge." Can I challenge it?
A: You can use the statutory protest path: file a written protest within thirty days of the rate publication under Tenn. Code Ann. § 7-82-402(a)(1), get a hearing before the commissioners, and seek review at the Utility Management Review Board. Final review goes to court via common-law writ of certiorari. Your protest needs to show the fee is unreasonable or is a disguised tax (proceeds going into general revenue, no service nexus, no rational classification).

Q: Are utility impact fees subject to the same constitutional limits as taxes?
A: Different limits. A tax must be authorized by a tax-granting statute and falls under Tennessee's tax-uniformity and public-purpose rules. A fee must be tied to service costs and apply evenhandedly to a class of customers under rational-basis equal protection. The label does not control: a charge with the structure of a tax (general revenue, no service nexus) will be treated as a tax even if called a fee.

Q: Did this opinion say the specific Rutherford County fees were legal?
A: The AG said it had no information suggesting the fees were unlawful, but did not conduct a full audit. The presumption ran in favor of the district. A specific challenger would need a record showing improper use of proceeds or arbitrary classifications.

Q: Are Columbia's impact fees on solid ground?
A: Yes, per this opinion. They rest on 1994 Tenn. Priv. Acts 194, are kept in a separate fund, and are used only for water system capital improvements consistent with the private act and the city ordinances at §§ 18-308 and 18-309.

Citations and references

Statutes and private acts:

• Tenn. Code Ann. §§ 7-82-101 to -804 (Utility District Law of 1937)
• Tenn. Code Ann. §§ 7-52-101 to -611 (Municipal Electric Plant Law of 1935)
• Tenn. Code Ann. § 7-34-114 (Revenue Bond Law)
• Tenn. Code Ann. § 67-4-2913
• 1994 Tenn. Priv. Acts 194

Cases:

• State v. Marshall, 319 S.W.3d 558 (Tenn. 2010)
• City of Tullahoma v. Bedford County, 938 S.W.2d 408 (Tenn. 1997)
• Memphis Natural Gas Co. v. McCanless, 194 S.W.2d 476 (Tenn. 1946)
• Tucker Corp. v. City of Clarksville, 2003 WL 21250811 (Tenn. Ct. App. May 30, 2003)
• Home Builders Ass'n of Middle Tennessee v. Maury County, 2000 WL 1231374 (Tenn. Ct. App. Aug. 31, 2000)
• Harding Academy v. Metropolitan Government of Nashville and Davidson County, 222 S.W.3d 359 (Tenn. 2007)

Source

• Landing page: https://www.tn.gov/attorneygeneral/opinions.html
• Original PDF: https://www.tn.gov/content/dam/tn/attorneygeneral/documents/ops/2012/op12-011.pdf

Original opinion text

"Growth and Development Fees" and "Impact Fees" Levied by Local Utilities
QUESTIONS
Lbl1. Are utility districts created under the Utility District Law of 1937 subject to the same
requirements as municipal water utilities operated by a board of public utilities established under
the Municipal Electric Plant Law of 1935?
Lbl2. Must utility districts formed under the Utility District Law of 1937 follow the same
guidelines as municipal water utilities for rates, fees, charges, and tolls for services?
Lbl3.a. Were "growth and development fees" assessed by the Consolidated Utility District in
Rutherford County since 1996 lawfully collected?
b. If the answer to a. is no, should they be refunded?
4.a. Were "impact fees" collected by Columbia Municipal Water lawfully collected?
b. If the answer to a. is no, should they be refunded?
Lbl5.a. Does the Utility District Law of 1937 allow utility districts to impose a fee that
functions as a tax?
b. If the answer to a. is no, should any such "fees" be refunded?
OPINIONS
Lbl1. No. The Municipal Electric Plant Law of 1935 does not apply to utility districts
incorporated under the Utility District Law of 1937.
Lbl2. No. Utility districts formed under the Utility District Law of 1937 must set rates in
accordance with Tenn. Code Ann. § 7-82-403. Water rates set by a public utilities board would
be governed by the statutory scheme applicable to the water system when the utilities board
took control of it.
Lbl3.a. Ordinarily, public utility rates are presumed to be reasonable, and the burden is on
the challenging party to prove they are not. Any growth and development fees charged by the
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Rutherford County Consolidated Utility District would be valid as authorized “fees,” rather than
unauthorized taxes, so long as they are used exclusively to operate and expand the water system
for the benefit of the party providing the fee. Further, the fees satisfy equal protection
requirements so long as they have a reasonable relationship to a legitimate utility district interest
and apply equally to all customers in the same class. This Office is unaware of any information
that would indicate these fees were unlawfully collected.
b. Given the response to question 3.a., the need to answer question 3.b is pretermitted.
4.a. Chapter 194 of the Private Acts of 1994 expressly authorizes the City of Columbia
to charge a water system impact fee. These fees are set forth in the Code of Ordinances of the
City of Columbia, §§ 18-308 and -309.
b. Because this Office has concluded the fees related to question 4.a. are authorized, the
need to answer question 4.b. is pretermitted.
5.a. A utility district created under the Utility District Law of 1937 has no authority to
levy a tax, but does have authority to levy fees to provide utility services to the individuals or
entities using the service. As previously mentioned, this Office is unaware of any information
indicating the fees in question were unlawfully collected.
b. The response to question 5.b. is pretermitted given the answer to question 5.a.
ANALYSIS

1. Applicability of Municipal Electric Plant Law to Utility Districts Created Under the
   Utility District Law
   This opinion generally concerns how water rates are set by utility districts, whether
   independently established or operated by a local government. The initial question is whether
   utility districts created under the Utility District Law of 1937 (“Utility District Law”), codified at
   Tenn. Code Ann. §§ 7-82-101 to -804, must follow the same requirements as a water utility
   operated by a board of public utilities created under the Municipal Electric Plant Law of 1935
   (“Electric Plant Law”), codified at Tenn. Code Ann. §§ 7-52-101 to -611.
   The Utility District Law authorizes a county mayor to approve the incorporation of a
   utility district. See Tenn. Code Ann. § 7-82-202. Once incorporated, a utility district is a
   “municipality” or public corporation in perpetuity under its corporate name. Tenn. Code Ann. §
   7-82-301(a)(1)(A). The district has no “power to levy or collect taxes,” and the statute provides
   that authorized charges for services “shall not be construed as taxes.” Id. The Utility District
   Law specifically states that a utility district created under the Utility District Law is generally
   only subject to its provisions, providing as follows:
   This chapter is complete in itself and shall be controlling. The provisions of any
   other law, general, special or local, except as provided in this chapter, shall not
   apply to a district incorporated under this chapter; provided, that nothing in this
   Rutherford County Consolidated Utility District would be valid as authorized "fees," rather than
   unauthorized taxes, so long as they are used exclusively to operate and expand the water system
   for the benefit of the party providing the fee. Further, the fees satisfy equal protection
   requirements so long as they have a reasonable relationship to a legitimate utility district interest
   and apply equally to all customers in the same class. This Office is unaware of any information
   that would indicate these fees were unlawfully collected.
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   chapter shall be construed as impairing the powers and duties of the department of
   environment and conservation.
   Tenn. Code Ann. § 7-82-107. The Utility District Law itself expresses no intent for the Electric
   Plant Law to apply to utility districts under its jurisdiction, and indeed by its terms excludes such
   utilities from the Electric Plant Law.
   Conversely, the Electric Plant Law does not mention utility districts, and no other
   language suggests it was intended to apply to utility districts organized under the Utility District
   Law. Under the Electric Plant Law, a “municipality” may appoint a board of public utilities to
   operate its electric plant. Tenn. Code Ann. § 7-52-107(a). As used in the act, “municipality”
   means “any county, metropolitan government, incorporated city or town in the state of
   Tennessee.” Tenn. Code Ann. § 7-52-102(10). The Electric Plant Law further authorizes the
   municipality to transfer to the board of public utilities other utilities, including waterworks, over
   which the municipality has control, stating:
   Municipalities now or hereafter owning or operating a waterworks, sewerage
   works, or gas system have the power and are hereby authorized to transfer to and
   confer upon the board the jurisdiction over such waterworks, sewerage works, or
   gas system now or hereafter vested in any other board, commission, or in the
   governing body of such municipalities.
   Tenn. Code Ann. § 7-52-111(a).
   Thus, given the specific directive of Tenn. Code Ann. § 7-82-107, the Electric Plant Law
   does not apply to utility districts incorporated under the Utility District Law. See also State v.
   Marshall, 319 S.W.3d 558, 562-563 (Tenn. 2010) (Tennessee Supreme Court finding that the
   General Assembly enacted a separate statutory scheme to regulate public housing, thus public
   housing is distinct from and not subject to the statutory provisions regulating utilities or hotel
   accommodations).
2. Guidelines for Utility Rates
   The second question is whether a utility district organized under the Utility District Law
   must follow the same guidelines as municipal water utilities for rates, fees, charges, and tolls for
   services. Under Tenn. Code Ann. § 7-82-403(a) of the Utility District Law, district
   commissioners of utilities formed under the Utility District Law must charge “reasonable” rates,
   fees, tolls, and charges for utility services and must revise them whenever necessary to ensure
   that the utility system “shall be and always remain self-supporting.” Rates and other charges
   must be sufficient to pay for operating and maintenance costs, including reserves for expenses,
   and to pay interest, principal, and required reserves for bonds. Id.
   The Electric Plant Law does not describe the duties of a public utilities board with respect
   to a municipal water utility over which it has assumed jurisdiction under Tenn. Code Ann. § 7-
   52-111. Under that statute, the public utilities board would have the power and responsibility
   chapter shall be construed as impairing the powers and duties of the department of
   Tenn. Code Ann. § 7-82-107. The Utility District Law itself expresses no intent for the Electric
   Plant Law to apply to utility districts under its jurisdiction, and indeed by its terms excludes such
   Conversely, the Electric Plant Law does not mention utility districts, and no other
   language suggests it was intended to apply to utility districts organized under the Utility District
   Law. Under the Electric Plant Law, a "municipality" may appoint a board of public utilities to
   operate its electric plant. Tenn. Code Ann. § 7-52-107(a). As used in the act, "municipality"
   means "any county, metropolitan government, incorporated city or town in the state of
   Tennessee." Tenn. Code Ann. § 7-52-102(10). The Electric Plant Law further authorizes the
   municipality to transfer to the board of public utilities other utilities, including waterworks, over
   Municipalities now or hereafter owning or operating a waterworks, sewerage
   works, or gas system have the power and are hereby authorized to transfer to and
   confer upon the board the jurisdiction over such waterworks, sewerage works, or
   gas system now or hereafter vested in any other board, commission, or in the
   Thus, given the specific directive of Tenn. Code Ann. § 7-82-107, the Electric Plant Law
   does not apply to utility districts incorporated under the Utility District Law. See also State V.
   Marshall, 319 S.W.3d 558, 562-563 (Tenn. 2010) (Tennessee Supreme Court finding that the
   General Assembly enacted a separate statutory scheme to regulate public housing, thus public
   housing is distinct from and not subject to the statutory provisions regulating utilities or hotel
   The second question is whether a utility district organized under the Utility District Law
   must follow the same guidelines as municipal water utilities for rates, fees, charges, and tolls for
   services. Under Tenn. Code Ann. § 7-82-403(a) of the Utility District Law, district
   commissioners of utilities formed under the Utility District Law must charge "reasonable" rates,
   fees, tolls, and charges for utility services and must revise them whenever necessary to ensure
   that the utility system "shall be and always remain self-supporting." Rates and other charges
   must be sufficient to pay for operating and maintenance costs, including reserves for expenses,
   The Electric Plant Law does not describe the duties of a public utilities board with respect
   to a municipal water utility over which it has assumed jurisdiction under Tenn. Code Ann. § 7-
   52-111. Under that statute, the public utilities board would have the power and responsibility
   Page 4
   under the separate statutory scheme governing the water system when the public utilities board
   took control of it.
   As previously explained, utility districts formed under the Utility District Law are subject
   to the provisions of the Utility District Law, and not the Electric Plant Law. Thus a utility district
   operating under the Utility District Law must set its rates in accordance with Tenn. Code Ann. §
   7-82-403(a) and is not subject to any other guidelines or requirements.
3. Consolidated Utility Growth and Development Fees
   a. Authority to Charge Growth and Development Fees
   In Tennessee, several different statutory schemes of general applicability govern the
   ownership and operation of a utility system and the setting of utility fees. See, e.g., Tenn. Code
   Ann. § 7-34-114 (Revenue Bond Law); Tenn. Code Ann. § 7-35-414 (sewers and waterworks);
   Tenn. Code Ann. §§ 9-21-107(8) & -308 (Local Government Public Obligations Law); Tenn.
   Code Ann. § 5-16-109 (urban type public facilities). These statutes generally require the
   charging of reasonable utility rates that will enable the system to be and remain self-supporting.
   This requirement, if not explicit in a statute, is implicit in the term “fees.” A fee is imposed for
   the purpose of regulating a specific activity or defraying the cost of providing a service or benefit
   to the party paying the fee. City of Tullahoma v. Bedford County, 938 S.W.2d 408, 412 (Tenn.
   1997). By contrast, a tax is a revenue raising measure levied for the purpose of paying the
   government’s general debts and liabilities. Id. The essential test to determine whether fees are
   really taxes is whether they are, or are not, paid into the general public treasury and disbursable
   for general public expenses. Memphis Natural Gas Co. v. McCanless, 183 Tenn. 635, 650-651,
   194 S.W.2d 476, 483 (Tenn. 1946). Water rates charged by a utility district, therefore, should be
   used only to defray the cost of providing service to the party paying the fee. Those costs would
   include capital costs for expanding or improving the system to provide service for any new
   development with respect to which the fee was assessed.
   Equal protection principles under the Tennessee and United States Constitutions apply to
   water rates charged by a public utility. See Tucker Corp. v. City of Clarksville, No. M2002-
   00627-COA-R3-CV, 2003 WL 21250811, 5 (Tenn. Ct. App. May 30, 2003). Thus, a
   governmental entity may charge different utility rates to different classes of users so long as the
   classifications are not arbitrary, unreasonable, or discriminatory. Utility rates that do not create a
   suspect classification or impinge upon a fundamental right will withstand an equal protection
   challenge if the classification bears some rational relationship to a legitimate state interest. Id.
   See also I-4 Commerce Center, Phase II, Unit I v. Orange County, 46 So.3d 134, 136 (Fla. Ct.
   App. 2010); City of Gainesville v. State, 863 So.2d 138, 144 (Fla. 2003); Mullenix-St. Charles
   Properties, L.P. v. City of St. Charles, 983 S.W.2d 550, 559 (Mo. Ct. App. 1998), motion for
   rehearing and/or transfer to Supreme Court denied (1999), application for transfer denied
   (1999).
   under the separate statutory scheme governing the water system when the public utilities board
   As previously explained, utility districts formed under the Utility District Law are subject
   operating under the Utility District Law must set its rates in accordance with Tenn. Code Ann. §
   7-82-403(a) and is not subject to any other guidelines or requirements.
   In Tennessee, several different statutory schemes of general applicability govern the
   ownership and operation of a utility system and the setting of utility fees. See, e.g., Tenn. Code
   Ann. § 7-34-114 (Revenue Bond Law); Tenn. Code Ann. § 7-35-414 (sewers and waterworks);
   Tenn. Code Ann. §§ 9-21-107(8) & -308 (Local Government Public Obligations Law); Tenn.
   Code Ann. § 5-16-109 (urban type public facilities). These statutes generally require the
   charging of reasonable utility rates that will enable the system to be and remain self-supporting.
   This requirement, if not explicit in a statute, is implicit in the term "fees." A fee is imposed for
   the purpose of regulating a specific activity or defraying the cost of providing a service or benefit
   to the party paying the fee. City of Tullahoma v. Bedford County, 938 S.W.2d 408, 412 (Tenn.
   1997). By contrast, a tax is a revenue raising measure levied for the purpose of paying the
   government's general debts and liabilities. Id. The essential test to determine whether fees are
   really taxes is whether they are, or are not, paid into the general public treasury and disbursable
   for general public expenses. Memphis Natural Gas Co. V. McCanless, 183 Tenn. 635, 650-651,
   194 S.W.2d 476, 483 (Tenn. 1946). Water rates charged by a utility district, therefore, should be
   used only to defray the cost of providing service to the party paying the fee. Those costs would
   include capital costs for expanding or improving the system to provide service for any new
   Equal protection principles under the Tennessee and United States Constitutions apply to
   water rates charged by a public utility. See Tucker Corp. v. City of Clarksville, No. M2002-
   00627-COA-R3-CV, 2003 WL 21250811, 5 (Tenn. Ct. App. May 30, 2003). Thus, a
   governmental entity may charge different utility rates to different classes of users so long as the
   classifications are not arbitrary, unreasonable, or discriminatory. Utility rates that do not create a
   suspect classification or impinge upon a fundamental right will withstand an equal protection
   challenge if the classification bears some rational relationship to a legitimate state interest. Id.
   See also I-4 Commerce Center, Phase II, Unit I v. Orange County, 46 So.3d 134, 136 (Fla. Ct.
   App. 2010); City of Gainesville v. State, 863 So.2d 138, 144 (Fla. 2003); Mullenix-St. Charles
   Properties, L.P. v. City of St. Charles, 983 S.W.2d 550, 559 (Mo. Ct. App. 1998), motion for
   rehearing and/or transfer to Supreme Court denied (1999), application for transfer denied
   Page 5
   The above standards govern whether growth and development fees charged by the
   Rutherford County Consolidated Utility District since 1996 were lawfully collected. The
   Consolidated Utility District was formed and operates under the Utility District Law. See
   History of Consolidated Utility District of Rutherford County, http://cudrc.com/About-us.aspx.
   The opinion request provided no specific information about the growth and development fees
   charged by the district. Nor has this Office conducted an independent factual inquiry into the
   subject. This Office however has reviewed general information about rates charged by the
   Consolidated Utility District at its web site, http://cudrc.com/. This information includes its 2010
   annual report and its current rates. The schedule of rates posted on the district’s web site is
   effective October 1, 2010. This schedule does not include a category of charges called “Growth
   and Development Fees,” but does include general guidelines for developers under the term “Tap
   Fees.” The schedule also includes “System Development Charges by Meter Size” for residential
   and commercial development. Finally, the schedule includes engineering fees and inspection
   fees. Two newspaper articles published in 2003 quote the district general manager referring to a
   “growth fee” in relation to a major expansion of the water system. Doug Davis, CUD Expansion
   will double its capacity: To treat 16 million gallons of water per day, Daily News Journal, 2003
   WLNR 18467961 (December 21, 2003); John Callow, KEEPING AHEAD OF GROWTH:
   McElroy, CUD working hard to meet demands for service,” Daily News Journal, 2003 WLNR
   18468219 (February 9, 2003).
   Turning to the question presented, utility districts do not have the authority to tax for
   general revenue raising purposes. See Memphis Natural Gas Co. v. McCanless, 194 S.W.2d at
4. In order for the growth and development fees to qualify as a “fee” instead of a tax, the
   district must use them to provide services to the party paying the fee and not for any other
   purpose. Appropriate fees could include costs related to improving and expanding the system to
   provide service for new development.
   Assuming the fees meet these requirements, the question then becomes whether the
   growth and development fees are “reasonable” rates within the meaning of Tenn. Code Ann. § 7-
   82-403. Courts have recognized that ratemaking is legislative in character. City of Knoxville v.
   Knoxville Water Co., 212 U.S. 1, 8, (1909); AT&T Communications of South Central States, Inc.
   v. Greer, No. 01A-01-9512-BC-00556, 1996 WL 697945, 7 (Tenn. Ct. App. Dec. 6, 1996).
   Courts in other jurisdictions have stated that, generally speaking, utility rates set by a
   municipality are presumed to be valid and reasonable until the contrary has been established;
   moreover, the burden of overcoming the presumption of validity and reasonableness rests with
   the challenging party. See, e.g., General Textile Printing and Processing Corp. v. City of Rocky
   Mount, 908 F.Supp. 1295, 1305 (E.D. N.C. 1995) (applying North Carolina Law); Eudora
   Development Co. of Kansas v. City of Eudora, 78 P.3d 437, 440 (Kan. 2003).
   In an unreported opinion, the Tennessee Court of Appeals recently upheld the City of
   Clarksville’s connection fees for its water and sewage system against a challenge by a developer.
   Tucker Corp. v. City of Clarksville, No. M2002-00627-COA-R3-CV, 2003 WL 21250811, 5
   (Tenn. Ct. App. May 30, 2003). Based on a rate study and plan submitted by an engineering
   firm, the City Council had adopted a higher schedule of connection fees for new development
   after 1992. The developer claimed, first, that the connection fee was an unauthorized tax. The
   The above standards govern whether growth and development fees charged by the
   Rutherford County Consolidated Utility District since 1996 were lawfully collected. The
   Consolidated Utility District was formed and operates under the Utility District Law. See
   History of Consolidated Utility District of Rutherford County,
   growth and development fees
   The opinion request provided no specific information about the
   charged by the district. Nor has this Office conducted an independent factual inquiry into the
   subject. This Office however has reviewed general information about rates charged by the
   annual report and its current rates. The schedule of rates posted on the district's web site is
   effective October 1, 2010. This schedule does not include a category of charges called "Growth
   and Development Fees," but does include general guidelines for developers under the term "Tap
   Fees." The schedule also includes "System Development Charges by Meter Size" for residential
   and commercial development. Finally, the schedule includes engineering fees and inspection
   fees. Two newspaper articles published in 2003 quote the district general manager referring to a
   "growth fee" in relation to a major expansion of the water system. Doug Davis, CUD Expansion
   will double its capacity: To treat 16 million gallons of water per day, Daily News Journal, 2003
   WLNR 18467961 (December 21, 2003); John Callow, KEEPING AHEAD OF GROWTH:
   for service," Daily News Journal, 2003 WLNR
   McElroy, CUD working hard to meet demands
   Turning to the question presented, utility districts do not have the authority to tax for
   general revenue raising purposes. See Memphis Natural Gas Co. v. McCanless, 194 S.W.2d at
5. In order for the growth and development fees to qualify as a "fee" instead of a tax, the
   district must use them to provide services to the party paying the fee and not for any other
   purpose. Appropriate fees could include costs related to improving and expanding the system to
   Assuming the fees meet these requirements, the question then becomes whether the
   growth and development fees are "reasonable" rates within the meaning of Tenn. Code Ann. § 7-
   82-403. Courts have recognized that ratemaking is legislative in character. City of Knoxville v.
   Knoxville Water Co., 212 U.S. 1, 8, (1909); AT&T Communications of South Central States, Inc.
   v. Greer, No. 01A-01-9512-BC-00556, 1996 WL 697945, 7 (Tenn. Ct. App. Dec. 6, 1996).
   Courts in other jurisdictions have stated that, generally speaking, utility rates set by a
   municipality are presumed to be valid and reasonable until the contrary has been established;
   moreover, the burden of overcoming the presumption of validity and reasonableness rests with
   the challenging party. See, e.g., General Textile Printing and Processing Corp. v. City of Rocky
   Mount, 908 F.Supp. 1295, 1305 (E.D. N.C. 1995) (applying North Carolina Law); Eudora
   Development Co. of Kansas v. City of Eudora, 78 P.3d 437, 440 (Kan. 2003).
   In an unreported opinion, the Tennessee Court of Appeals recently upheld the City of
   Clarksville's connection fees for its water and sewage system against a challenge by a developer.
   Tucker Corp. v. City of Clarksville, No. M2002-00627-COA-R3-CV, 2003 WL 21250811, 5
   (Tenn. Ct. App. May 30, 2003). Based on a rate study and plan submitted by an engineering
   firm, the City Council had adopted a higher schedule of connection fees for new development
   after 1992. The developer claimed, first, that the connection fee was an unauthorized tax. The
   Court rejected this challenge. The Court noted that revenues from the fee were not paid into the
   city's general fund but, instead, were deposited into a water, sewage, and gas utility funds
   account. The Court stated that the fees had been used solely for the purpose of defraying the cost
   of providing service for the benefit of the party paying the fee by improving and upgrading the
   City's sewage and water system. Id. at 5. For these reasons, the Court concluded that the
   The Court also rejected the developer's claim that the fees violated the Equal Protection
   Clause of the Tennessee and United States Constitutions. The Court noted that, under an equal
   protection analysis under either federal or Tennessee law, a classification will be upheld if some
   reasonable basis can be found for it, or if any state of facts may reasonably be conceived to
   justify it. The Court found that the connection fee had a reasonable relationship to a legitimate
   city interest and applied equally to all customers in the same class. The Court stated that
   "[a]ssessment of the fee would not be unconstitutional even it if resulted in some inequality
   inasmuch as the rational basis test has been met." Id. at 6.
   Under these principles, any growth and development fees charged by the Consolidated
   Utility District would be considered authorized "fees," rather than unauthorized taxes, so long as
   they are used exclusively to operate and expand the water system for the benefit of the party
   paying the fee. Further, the fees would withstand equal protection requirements so long as they
   have a reasonable relationship to a legitimate utility district interest and apply equally to all
   This question need not be answered, given this Office has concluded the fees in question
   1 Tennessee law provides processes by which a customer may challenge a utility district's setting of rates. Several
   Tennessee statutes provide for review of utility district water rates by the Tennessee Utility Management Review
   Board ("Board), including Tenn. Code Ann. § 7-82-102(a). See generally Tenn. Code Ann. § 7-82-702. Tenn.
   Code Ann. § 7-81-102(a) authorizes the Board to review rates charged and services provided by certain defined
   public utility districts. This review must be initiated by a petition signed by at least ten per cent of the users within
   the authorized area of the public utility district. The proceedings must comply with the Uniform Administrative
   Procedures Act, Tenn. Code Ann. §§ 4-5-101 to -404. Furthermore, under Tenn. Code Ann. § 7-82-401(d), utility
   district commissioners generally must publish a statement showing, among other information, a statement of the
   water rates then being charged by the district and a brief statement of the method used in arriving at such rates.
   Tenn. Code Ann. § 7-82-402(a)(1) permits a water customer to file a written protest of water rates within thirty days
   of the date that the statement is published. The commissioners must conduct a hearing on the protests in which they
   examine statements and exhibits and consider arguments by the protesting customers or their counsel. The
   commissioners must then make written findings as to the reasonableness or unreasonableness of the published rates
   and record them in the minutes. The commissioners may increase or decrease the rates upon a finding that they are
   too low or too high. A protesting customer may obtain review of the commissioners' action by written request to the
   Utility Management Review Board within thirty days. The Board's decision is subject to judicial review in the
   county of the utility district's principal office under the common law writ of certiorari. This type of judicial review
   Page 6
   Court rejected this challenge. The Court noted that revenues from the fee were not paid into the
   city’s general fund but, instead, were deposited into a water, sewage, and gas utility funds
   account. The Court stated that the fees had been used solely for the purpose of defraying the cost
   of providing service for the benefit of the party paying the fee by improving and upgrading the
   City’s sewage and water system. Id. at 5. For these reasons, the Court concluded that the
   connection charge was a utility fee and not an unauthorized tax.
   The Court also rejected the developer’s claim that the fees violated the Equal Protection
   Clause of the Tennessee and United States Constitutions. The Court noted that, under an equal
   protection analysis under either federal or Tennessee law, a classification will be upheld if some
   reasonable basis can be found for it, or if any state of facts may reasonably be conceived to
   justify it. The Court found that the connection fee had a reasonable relationship to a legitimate
   city interest and applied equally to all customers in the same class. The Court stated that
   “[a]ssessment of the fee would not be unconstitutional even it if resulted in some inequality
   inasmuch as the rational basis test has been met.” Id. at 6.
   Under these principles, any growth and development fees charged by the Consolidated
   Utility District would be considered authorized “fees,” rather than unauthorized taxes, so long as
   they are used exclusively to operate and expand the water system for the benefit of the party
   paying the fee. Further, the fees would withstand equal protection requirements so long as they
   have a reasonable relationship to a legitimate utility district interest and apply equally to all
   customers in the same class.
   This Office, based upon the information available to it, can find no reason to conclude
   that the fees at issue were unlawfully collected.
   b. Requirement to Refund Unauthorized Fees
   This question need not be answered, given this Office has concluded the fees in question
   appear to be appropriately authorized.1
   1
   Tennessee law provides processes by which a customer may challenge a utility district’s setting of rates. Several
   Tennessee statutes provide for review of utility district water rates by the Tennessee Utility Management Review
   Board (“Board), including Tenn. Code Ann. § 7-82-102(a). See generally Tenn. Code Ann. § 7-82-702. Tenn.
   Code Ann. § 7-81-102(a) authorizes the Board to review rates charged and services provided by certain defined
   public utility districts. This review must be initiated by a petition signed by at least ten per cent of the users within
   the authorized area of the public utility district. The proceedings must comply with the Uniform Administrative
   Procedures Act, Tenn. Code Ann. §§ 4-5-101 to -404. Furthermore, under Tenn. Code Ann. § 7-82-401(d), utility
   district commissioners generally must publish a statement showing, among other information, a statement of the
   water rates then being charged by the district and a brief statement of the method used in arriving at such rates.
   Tenn. Code Ann. § 7-82-402(a)(1) permits a water customer to file a written protest of water rates within thirty days
   of the date that the statement is published. The commissioners must conduct a hearing on the protests in which they
   examine statements and exhibits and consider arguments by the protesting customers or their counsel. The
   commissioners must then make written findings as to the reasonableness or unreasonableness of the published rates
   and record them in the minutes. The commissioners may increase or decrease the rates upon a finding that they are
   too low or too high. A protesting customer may obtain review of the commissioners’ action by written request to the
   Utility Management Review Board within thirty days. The Board’s decision is subject to judicial review in the
   county of the utility district’s principal office under the common law writ of certiorari. This type of judicial review
   The next question is whether impact fees collected by CPWS were lawfully collected.
   Again, this Office has not conducted an independent factual inquiry into this subject but has
   reviewed the available material on the CPWS website, The CPWS was
   founded in 1939 under the Electric Plant Law, and in 1941 gained jurisdiction over Columbia's
   The impact fees in question were authorized by private act. In 1994, the General
   Assembly passed a private act explicitly authorizing the Columbia City Council to impose impact
   SECTION 3. It is the intent and purpose of this act to grant to the Columbia
   governing body the authority to establish a regulatory procedure or system to
   collect fees from the developer of any new land development activity so as to
   require the developer to share in the burdens of growth by paying a pro rata share
   for the reasonably anticipated expansion cost of public improvements generated
   SECTION 7. The impact fees collected by the City of Columbia pursuant to this
   act shall be kept in a separate fund from other revenue of the governmental entity.
   Funds collected by impact fees shall be used for the acquisition, expansion and
   development of the capital or public improvements for which they were collected
   and shall be withdrawn and expended as may be designated by ordinance of the
   Id. at 3, 7.
   The Act defined "capital or public improvements" as
   the construction, building, replacement, extension or enlargement of any
   waterworks, water distribution system, sewer or sewerage system authorized by
   is limited to determining whether the Board exceeded its jurisdiction, followed an unlawful procedure, acted
   illegally, arbitrarily, or fraudulently, or acted without material evidence to support its decision. See, e.g., Harding
   Academy v. Metropolitan Government of Nashville and Davidson County, 222 S.W.3d 359, 363 (Tenn. 2007)
   (citing Willis v. Tennessee Department of Correction, 113 S.W.3d 706, 712 (Tenn. 2003)). Tenn. Code Ann. § 7-82-
   702(19) also allows a customer or developer to challenge a utility district's requirement that a customer or developer
   build utility systems to be dedicated to the utility district, or the justness and reasonableness of fees or charges
   against the customer or developer related to the utility systems. The Utility Management Review Board must review
   the decision of the utility district commissioners, upon written complaint filed, within thirty days of the
   commissioners' action. Judicial review of the Board's decision is by common law writ of certiorari.
   Page 7
6. Columbia Power & Water Systems (CPWS) Impact Fees
   a. Authority to Collect
   The next question is whether impact fees collected by CPWS were lawfully collected.
   Again, this Office has not conducted an independent factual inquiry into this subject but has
   reviewed the available material on the CPWS website, http://www.cpws.com/. The CPWS was
   founded in 1939 under the Electric Plant Law, and in 1941 gained jurisdiction over Columbia’s
   waterworks and sewage distribution system. Id.
   The impact fees in question were authorized by private act. In 1994, the General
   Assembly passed a private act explicitly authorizing the Columbia City Council to impose impact
   fees on new development. 1994 Tenn. Priv. Acts 194. This act provides in pertinent part:
   SECTION 3. It is the intent and purpose of this act to grant to the Columbia
   governing body the authority to establish a regulatory procedure or system to
   collect fees from the developer of any new land development activity so as to
   require the developer to share in the burdens of growth by paying a pro rata share
   for the reasonably anticipated expansion cost of public improvements generated
   by the new land development activity.
   . . . . .
   SECTION 7. The impact fees collected by the City of Columbia pursuant to this
   act shall be kept in a separate fund from other revenue of the governmental entity.
   Funds collected by impact fees shall be used for the acquisition, expansion and
   development of the capital or public improvements for which they were collected
   and shall be withdrawn and expended as may be designated by ordinance of the
   governing body.
   Id. at §§ 3, 7.
   The Act defined “capital or public improvements” as
   the construction, building, replacement, extension or enlargement of any
   waterworks, water distribution system, sewer or sewerage system authorized by
   is limited to determining whether the Board exceeded its jurisdiction, followed an unlawful procedure, acted
   illegally, arbitrarily, or fraudulently, or acted without material evidence to support its decision. See, e.g., Harding
   Academy v. Metropolitan Government of Nashville and Davidson County, 222 S.W.3d 359, 363 (Tenn. 2007)
   (citing Willis v. Tennessee Department of Correction, 113 S.W.3d 706, 712 (Tenn. 2003)). Tenn. Code Ann. § 7-82-
   702(19) also allows a customer or developer to challenge a utility district’s requirement that a customer or developer
   build utility systems to be dedicated to the utility district, or the justness and reasonableness of fees or charges
   against the customer or developer related to the utility systems. The Utility Management Review Board must review
   the decision of the utility district commissioners, upon written complaint filed, within thirty days of the
   commissioners’ action. Judicial review of the Board’s decision is by common law writ of certiorari.
   Page 8
   the governing body of the governmental entity; and includes any one (1) or more
   or any combination of these public improvements.
   Id. at § 2(c) (emphasis added).
   The Municipal Technical Advisory Service maintains a copy of the Code of Ordinances
   of the City of Columbia updated through June 16, 2011. See Code of Ordinances for Columbia,
   http://www.mtas.utk.edu/public/municodes.web.nsf?opendatabase. Section 18-303 lists water
   service rates, fees, and charges. Id. Water impact fees are authorized under Section 18-308. Id.
   Under § 18-308(7) these fees must be used exclusively for the purpose of capital improvements
   that expand the capacity of the water distribution and collection network. Id. Section 18-309
   establishes a separately earmarked Water Impact Fee Fund to receive water impact fees.
   The water impact fee provided by the private act and implementing ordinances is thus
   valid and authorized. It must be deposited in a special fund and used solely for water system
   capital improvements. This characteristic confirms this governmental charge is a fee, not a tax.
   See Tucker Corp. v. City of Clarksville, 2003 WL 21250811, at 5. Further, it purports to defray
   a pro rata share for the reasonably anticipated expansion cost of public improvements generated
   by new land development activity. This is also an important characteristic of a fee. Home
   Builders Ass’n of Middle Tennessee v. Maury County, No. M1999-02383-COA-R3-CV, 2000
   WL 1231374, at 3-4 (Tenn. Ct. App. August 31, 2000), p.t.a. denied--not for citation (March 6,
   2001); Op. Tenn. Att’y Gen. 86-75 (March 26, 1986). In addition, the fee does not conflict with
   state general law. See Tenn. Code Ann. § 67-4-2913 (city or county may continue to levy impact
   fees under a private act in effect before June 20, 2006). For all these reasons, the City of
   Columbia is authorized to collect water impact fees levied under this authority.
   b. Requirement to Refund Unauthorized Fees
   Because this Office has concluded the impact fees are authorized, this issue is
   pretermitted.
7. Authority of Utility District to Charge a Tax
   a. Fee that is Functionally a Tax
   A utility district created under the Utility District Law does not have the authority to
   impose a tax. Tenn. Code Ann. § 7-82-301(a)(1)(A). Such a charge, therefore, would be
   unauthorized. As previously stated, this Office has received no information to indicate that the
   fees in question collected by Consolidated Utility District under the Utility District Law are
   unauthorized taxes. Rather the assessments at issue appear to be appropriately characterized as
   fees authorized to be assessed under Tennessee law.
   the governing body of the governmental entity; and includes any one (1) or more
   The Municipal Technical Advisory Service maintains a copy of the Code of Ordinances
   of the City of Columbia updated through June 16, 2011. See Code of Ordinances for Columbia,
   Section 18-303 lists water
   service rates, fees, and charges. Id. Water impact fees are authorized under Section 18-308. Id.
   Under § 18-308(7) these fees must be used exclusively for the purpose of capital improvements
   expand the capacity of the water distribution and collection network. Id. Section 18-309
   that
   The water impact fee provided by the private act and implementing ordinances is thus
   valid and authorized. It must be deposited in a special fund and used solely for water system
   capital improvements. This characteristic confirms this governmental charge is a fee, not a tax.
   See Tucker Corp. v. City of Clarksville, 2003 WL 21250811, at 5. Further, it purports to defray
   a pro rata share for the reasonably anticipated expansion cost of public improvements generated
   by new land development activity. This is also an important characteristic of a fee. Home
   Builders Ass'n of Middle Tennessee v. Maury County, No. M1999-02383-COA-R3-CV, 2000
   WL 1231374, at 3-4 (Tenn. Ct. App. August 31, 2000), p.t.a. denied--not for citation (March 6,
   2001); Op. Tenn. Att'y Gen. 86-75 (March 26, 1986). In addition, the fee does not conflict with
   state general law. See Tenn. Code Ann. § 67-4-2913 (city or county may continue to levy impact
   fees under a private act in effect before June 20, 2006). For all these reasons, the City of
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   Page 9
   b. Requirement to Refund Unauthorized Taxes by Utility Districts
   Given this Office’s conclusion that the fees at issue appear to be appropriately authorized,
   this question is pretermitted.
   ROBERT E. COOPER, JR.
   Attorney General and Reporter
   WILLIAM E. YOUNG
   Solicitor General
   ANN LOUISE VIX
   Senior Counsel
   Requested by:
   The Honorable Jim Tracy
   State Senator
   2 Legislative Plaza (216)
   Nashville, Tennessee 37243
   Given this Office's conclusion that the fees at issue appear to be appropriately authorized,