dissenting.
I respectfully dissent from the majority opinion because the Court of Appeals correctly determined that the Simpson Circuit Court had jurisdiction over a contract dispute between the City of Franklin and the water district. The Public Service Commission has jurisdiction only over the rates and services of a “utility,” publicly or privately owned, as distinguished from city-owned.
KRS 278.010(3) clearly provides that “utility means any person except a city, who owns, controls or operates or manages any facility used or to be used in connection with ... the impounding, distribution or furnishing of water to or for the public for compensation.” The majority opinion should not ignore the plain meaning of the statute.
Contrary to the argument of the water district, the PSC act was intended only to transfer the city’s preexisting power over rates for services rendered by a utility within the city limits. The statute does not grant the PSC jurisdiction over the rates charged by a city-owned utility which is not a utility as defined in KRS 278.010(3).
Southern Bell Telephone & Telegraph Co. v. City of Louisville, 265 Ky. 286, 96 S.W.2d 695 (1936), held that the provisions of Section 4(n) of the PSC act did not conflict with Sections 163 and 164 of the Kentucky Constitution. The case carefully distinguished between the rights of city-owned utilities and publicly owned private utilities. The purpose of Section 4(n) of the original PSC act was not to grant the commission jurisdiction over the rates of city-owned utilities, rather the statute was intended to transfer jurisdiction to the commission over public utility rates which had been fixed initially by a city at the time a utility franchise was granted.
This exemption of city-owned water utilities from commission regulation has been a part of the law for at least 58 years. 1936 Kentucky Acts, Chap. 92 § 1(c). McClellan v. Louisville Water Company, Ky., 351 S.W.2d 197 (1961), held that the exemption provided for cities extends to all operations of a municipally-owned utility.
McClellan, supra, followed a line of cases including City of Olive Hill v. Public Service Com’n, 305 Ky. 249, 203 S.W.2d 68 (1947); Louisville Water Co. v. Preston Street Road Water List., Ky., 256 S.W.2d 26 (1953) and Louisville Water Co. v. Public Service Com’n, Ky., 318 S.W.2d 537 (1958). McClellan was followed in City of Georgetown v. Public Service Com’n, Ky., 516 S.W.2d 842 (1974) in which the court stated, “We feel compelled to follow the clear language of KRS 278.010(3).”
The Court of Appeals decision does not leave the water district and its customers at *466the complete mercy of the city. The circuit court has jurisdiction to adjudicate all issues arising out of the contract on the merits, including any claim that the rates charged by the city are arbitrary or unreasonable.
The rates and services exception has nothing to do with the rates charged by a city-owned utility. The history of the Public Service Commission Acts indicates that the rates and services exception is simply a statutory exception to the power of a city to fix by contract the rates charged by a utility for services inside the city limits. Prior to the adoption of the PSC Acts, cities regulated the rates charged by utilities for services inside the city limits. In exercising its power to grant a franchise to use the public streets pursuant to Sections 163 and 164 of the Kentucky Constitution, a city could establish a utility’s initial rates in the franchise agreement. Cf. Frankfort Natural Gas Co. v. City of Frankfort, 204 Ky. 254, 263 S.W. 710 (1924). During the existence of the franchise agreement, the city and the utility were free to modify those rates by additional contractual agreement. Johnson County Gas Co. v. Stafford, 198 Ky. 208, 248 S.W. 515 (1923).
From a historical perspective, Chapter 278 was adopted in the early 1930⅛ when many utilities had contracts with cities which obligated the utilities to furnish services to the citizens of the city under uniform rates and conditions. The utility was permitted to place its lines along the public ways, and in return, the utility paid an annual flat franchise fee or percentage of revenues to the city.
It is essential to recognize the fact that it is the City, which is not a private or public utility, that is furnishing the service and arbitrarily or by negotiation prescribing a rate. It is not the promulgated service rate of a resale customer of a city that would be an issue. It has been general policy that because the PSC has no jurisdiction over the former, it has no jurisdiction over its rate problems.
KRS 278.040(2) gave the PSC exclusive jurisdiction over the regulation of rates and utilities, but by definition, excluded the city. There was a period of time when cities filed certain reports with the PSC. The remainder of KRS 278.040(2) reserves the rights of a city or other political subdivision, such as a county, to effectuate safety and environmental protection regulations.
Benzinger v. Union Light, Heat & Power Co., 293 Ky. 747, 170 S.W.2d 38 (1943), considered the intention of the legislature as stated in Section 4(n) of the PSC act to the effect that it was expressly stated that the intention was to confer jurisdiction only over the matter of rates and service. Peoples Gas, supra, and Benzinger indicate that the original Section 4(n), now KRS 278.200 and 278.040(2), created an exception to the authority of cities to regulate the rates of a utility for services rendered inside the city limits. There is nothing in the statutory language which creates an exception to the exemption of city-owned utilities from PSC jurisdiction. The PSC jurisdiction was limited to the rates and services of a utility.
By statutory definition, the City of Franklin is not a public utility subject to the jurisdiction of the PSC. KRS 278.010(3). However, the Simpson County Water District, which is organized under KRS Chapter 74 is considered to be a public utility subject to the jurisdiction of the PSC. KRS 278.015.
The only public utility in this dispute is the Simpson County Water District. The wholesale rates for water sold by the city to the water district do not constitute a charge or other compensation for services rendered by the district. Accordingly, they are not rates within the statutory definition provided in KRS 278.010(11).
In addition, the rates charged by the water district do not relate to the “quality” or “quantity” of the water sold by the district so as to fall within the statutory definition of service. Cf. Benzinger 170 S.W.2d at page 41.
KRS 278.200, which gives the PSC jurisdiction over rates of any utility that has been or may be fixed by any contract, franchise or agreement between the utility and any city fails to consider that this contract does not purport to fix the rates charged by the District which is the only public utility in question. . The contract sets only the rates *467charged by a city-owned utility. KRS 278.-200 does not apply in this situation.
The legislative history of the regulatory acts indicates that sales by a city-owned utility to a water district are exempt from PSC regulation. From approximately 1936 to 1964, both cities and water districts were excepted from the definition of a “utility.” In 1964, the General Assembly deleted the exception for water districts and expressly provided that districts were public utilities subject to the jurisdiction of the PSC. City of Georgetown v. Public Service Com’n, Ky., 516 S.W.2d 842 (1974). This Court held in the McClellan case that a city’s exemption from PSC regulation extended to all operations of a city-owned utility, whether within or without city limits. Approximately three years later, in the 1964 amendments to the PSC act, the legislature did not attempt to overrule McClellan by subjecting any of the activities of a city-owned utility to commission regulation. The legislature only granted the PSC jurisdiction over rates charged by the water districts.
After that time, a water district could not pass on a wholesale rate increase to its customers without filing a rate case in which the imposition of the new rates by the district could be delayed for five months. KRS 278.-190(2). Again, in 1986, the General Assembly considered the problem of regulatory lag by permitting a water district to pass on an increase in wholesale rates to its customers immediately without commission approval. KRS 278.015(2). Once again, in addressing the problem of regulatory lag, the General Assembly did not subject city-owned utilities to PSC regulation so that the commission could consider the increased wholesale rates of a city-owned utility simultaneously with new retail rates of a water district. There would be no necessity for the 1986 legislation if the wholesale rates of a city-owned utility had been subject to PSC regulation.
KRS 278.200 recognizes the fact that at the time of the enactment of Chapter 278 some utilities had contracts with cities for the rendition of utility services. This section prevents a sudden arbitrary abrogation of a utility contract with a city until a hearing has been held before the PSC in the manner prescribed by the statute. Consequently, the commission could change any rate that has been fixed by contract between the utility and the city for services by a utility within the city as to its citizens but only after a public hearing. In this manner it appears that a legal issue of constitutional proportions, the abrogation of contracts affecting the public, would be avoided by reason of affording due process. The days of city control over public utilities are long past.
Under Section 200, it is clear that because the commission is not bound by any contract, franchise or agreement for service between a utility and the city in which it operates, it can prescribe reasonable rates for a utility to charge within a city. However, because the city itself is not a utility as defined in KRS 278.010(3), a municipal water plant sets its own rates. Accordingly, the city no longer has the power to regulate rates of privately-owned utilities. It has been superseded by the PSC.
A city does l-etain inherent police power under KRS 278.040(2) over all public utility lines within the city limits and it has statutory jurisdiction by exclusion as a utility under KRS 278.010(3) over any utility plant owned and operated by itself. Therefore it can set its own rates without PSC approval, but not the rates of privately-owned utilities. Moreover, city-owned water or electric plants are not subject to PSC safety or health regulations. Such is the regulatory province of the Kentucky Division of Water (DOW), EPA and other agencies. Cities file no reports with the PSC. Neither can the PSC be an arbitrator of city matters.
In this situation, the city as a supplier is expressly excluded from the definition of a utility in KRS 278.010(3). In view of the fact that the city is specifically excluded from the definition of a utility in the statute, there is no ambiguity or conflict giving the courts a vehicle to construe the city as subject to PSC regulation and exclude its right to file in circuit court to determine the contractual obligations if any to the Simpson County Water District.
In my view the circuit court, and not the PSC, is the proper forum for the adjudication *468of the merits of this dispute. I would affirm the Court of Appeals and reverse the trial court.
LEIBSON and SPAIN, JJ., join in this dissent.