A federal judge has ordered a lawsuit between the City of Covington and Duke Energy to be returned to state court this month, ruling that Duke had failed to demonstrate that federal law was at issue in the case.
The lawsuit centers on a dispute between the city and the company regarding whether the company is required to enter into a formal franchise agreement with the city. The results of the case could have ramifications for the state of the city’s infrastructure in the future.
Franchise agreements are contracts between utility providers and cities. They usually entail a city charging a fee in exchange for allowing the company to work and maintain its equipment on public streets. The city has argued in the past that Duke has been difficult to work with, especially as it relates to subcontractors, such as Spectrum, piggybacking onto Duke’s infrastructure.
“Those companies then effectively operate in secret within Covington and are able to evade paying required taxes and fees like everyone else,” the city alleged last year. “Duke’s refusal to provide this simple information also delays streetscape projects and residential and commercial development, leading to increased wear and tear on vehicles, more traffic congestion and increased construction costs.”
The city first filed suit against Duke with the Franklin County Circuit Court and the Kentucky Public Service Commission, which is responsible for setting utility rates in the commonwealth, in November. The previous Covington City Commission voted on Oct. 22 to allow the city’s legal department to begin the process of bringing suit against the company.
“Regardless of the outcome, the legal fight will have zero effect on customers’ rates and the availability of electric service,” according to a November city press release that announced the lawsuit.
The city passed a requirement for franchise agreements in May of last year and approved a franchise agreement with Owen Electric Cooperative in October. Most city residents use Duke Energy for their utilities, although some residents of South Covington use Owen.
Duke has repeatedly affirmed that a franchise agreement is unnecessary.
Brian Pokrywka, one of Duke’s in-house lawyers, made this case to the board of commissioners at a public meeting on April 9, 2024.
“For more than 140 years, since 1881, Duke Energy, through its predecessor companies, has provided, for a while, affordable electricity to the city of Covington without any form of franchise agreement in place,” Pokrywka said at the meeting.
The city’s suit asks the court to deny Duke’s argument and the utility commission to force Duke to follow the same bidding process as Owen did. It does this by asking the court to issue judgements on a group of declarations, most notable for subsequent filings is the first, which asks the court to validate its franchise ordinance.
“Duke claims that it is the successor to Covington Electric Light Company, which was granted an exclusive electric franchise in its charter incorporated by the Kentucky General Assembly in 1882,” the complaint reads. “Duke argues that [the Kentucky Constitution and relevant laws] do not apply to its franchise because it allegedly inherited the franchise from Covington Electric Light Company, which was granted the franchise in 1882 before those laws were enacted in 1891.”
Covington Electric Light Company was absorbed into another company, The Suburban Electric Company, in 1894, which, in turn, went through its own series of mergers, consolidations and buy-outs down the years before its successor company was bought by Duke Energy in 2006.
The city’s legal department points to a U.S. Supreme Court case from 1904 , Shaw v. City of Covington, involving Covington Electric Light Company, which the city argues extinguished the perpetual franchise Duke argues it inherited from its predecessors.
“Everything in the constitution looked to the abolition and refusal of special privileges and to putting all corporations on an equal footing,” the Supreme Court wrote in the Shaw case. “It was natural, therefore, when old corporations consolidated, that the law should treat the new corporation which it then called into being as it would have treated another corporation coming into being at the same time.”
“Under the Court’s ruling in Shaw, Duke could not have inherited an exclusive franchise from Covington Electric Light Company because that franchise ceased to exist when the company was consolidated into The Suburban Electric Company,” the city argues in its complaint.
Duke attempted to move the case from the Franklin County court to federal court at the end of December. Duke argued that a local court did not have jurisdiction over the city’s request to validate its ordinance, essentially saying the city had not established that its ordinance conformed to the contract clause of the U.S. Constitution, which says that states can’t pass laws that impair contractual agreements.
“A necessary component to the relief sought in Declaration One is a finding that the Franchise Ordinance does not run afoul of the Contract Clause of the U.S. Constitution,” Duke’s filing reads. “As the Complaint makes clear, Covington seeks to impair Duke Energy’s longstanding perpetual electric right-of-way franchise in Covington issued by the General Assembly of the Commonwealth of Kentucky in 1882.”
The city filed to return the case to the Franklin County Circuit Court at the end of January. Duke responded a little less than a month later in February. Finally, on June 5, U.S. District Judge Gregory F. Van Tatenhove issued a judgement in favor of the city, remanding the case back to the local court.
Van Tatenhove did not find Duke’s argumentation convincing.
“Duke Energy’s reliance on the Contract Clause is merely an anticipated defense, not an element of the City of Covington’s claims…,” Van Tatenhove writes in this order. “Duke Energy cannot show that a federal issue is necessarily raised in this case nor that it would be substantial (assuming it were to ultimately be present at all). And opening the courthouse doors based on the passing federal defense Duke Energy raises in this case would upset the Congressionally approved state-federal balance…”
As such, any future proceedings will take place in the Franklin County Circuit Court. The case is ongoing.