A Quick Guide to Utility Account Overcharges, Undercharges, and the Statute of Limitations

The world is an imperfect place, so sometimes mistakes happen. In the context of utility billing, oftentimes the mistake is discovered quickly, an appropriate adjustment is made on the next bill, and things return to normal. However, sometimes a mistake goes undetected for years. These types of situations can be difficult for both the utility and its customer.

This blog will explore the role of the statute of limitations in connection with utility billing. The applicable statute of limitations differs depending on whether there is an overcharge or an undercharge, so let’s consider them separately.

Overcharges and the Discovery Rule

MRSC is of the view that the statute of limitations for a utility overcharge is three years under RCW 4.16.080. The two subsections of the statute that may apply are subsection (3) — action on a contract not in writing — or subsection (4) — fraud/misrepresentation. Keep in mind that an action to recover utility overpayments will be brought by the customer, so the applicable statute of limitations may depend on how the claim is pled. In addition, the time at which the statute of limitations starts to run will depend on whether an overcharge could have been discovered by the customer in the exercise of reasonable diligence.

The primary Washington case on utility overcharges and the statute of limitations is Western Lumber v. City of Aberdeen, 10 Wn. App. 325, 518 P.2d 745 (1973). In that case, the customer discontinued operation of a sawmill but continued to receive water bills with high consumption rates. The parties inspected the lines and discovered an “extra” water meter that resulted in charges for double the amount of water actually used by the mill over a twelve-year period. The utility refunded the most recent three years of overcharges based on RCW 4.16.080(3), taking the position that the three-year statute of limitations precluded a refund going back more than three years. The customer promptly sued to recover the overcharge for the remaining nine years, asserting that RCW 4.16.080(4) applied and that the three-year statute of limitations did not begin to run until the customer discovered the overcharge. Under this “discovery rule,” the customer would be entitled to a refund for the entire 12-year period since the customer filed the lawsuit within three years of discovering the overcharge.   

The court agreed with the customer. Although RCW 4.16.080(4) refers to “fraud,” the courts have interpreted the term to include negligent and innocent misrepresentations on the part of the defendant. The fact that the utility did not intend to overcharge the customer was not relevant to the court’s statute of limitations analysis and the customer’s refund period was not limited to three years.

It should be noted that under the “discovery rule,” knowledge of the fraud or misrepresentation will be inferred if a customer, through exercise of due diligence, could have discovered it. In cases where an overcharge arises through a utility’s misrepresentation, the utility should assess whether and how the discovery rule impacts the time period for which a refund should be provided.

Not all overcharges involve utility misrepresentations, and in some cases an overcharge may be discoverable by the customer from the beginning. In such cases a three-year refund period may be appropriate. Consider this scenario: a utility properly imposes stormwater utility charges on a customer. The customer then removes the structure on the property (that provided the basis for imposing a stormwater charge) but does not inform the utility, which continues to bill for stormwater. Six years later, the customer seeks a refund. During the six-year period the customer has received periodic bills from the utility showing a line item for a stormwater charge. In that situation, a utility could take the position that the refund period should be three years since the customer was made aware of the stormwater charges each time a bill was received.

Undercharges and Accounts Receivable

When a utility discovers it has undercharged a customer, it generally must collect the amount of the undercharge for at least two reasons. First, to do otherwise could be considered an improper gift of public funds. Second, waiving or foregoing collection of utility undercharges may violate the public policy against rate preferences as stated in Housing Authority v. NE Lake Washington Sewer & Water Dist. 784 P.2d 1284, 1288 (1990). In that case a government housing authority constructed a low-income housing project on property that had previously been used as a single-family residence. The utility continued billing the property at single-family rates for over four years before discovering the error.

The housing authority sought a court declaration that it was not responsible for paying the balance due, asserting equitable defenses such as laches and estoppel. The court concluded that the public policy against rate discrimination requires a utility to collect undercharges even when the customer happens to be a government entity that provides affordable housing. In light of that public policy, a utility customer (whether it is a private or government entity) may not assert equitable defenses in response to an action to recover utility undercharges. Although Housing Authority involved a water-sewer district operating under RCW Title 57, the public policy that charges shall be uniform for the same classes of customers or services applies to all municipal utilities.

But the statute of limitations is a legal, not an equitable defense, which means that a customer may assert the statute of limitations as a defense in a lawsuit to collect utility undercharges. What, then, is the statute of limitations for undercharges?

Again, the answer is not simple. RCW 4.16.040(2) provides for a six-year statute of limitations for an account receivable, which is defined as:

any obligation for payment incurred in the ordinary course of the claimant's business or profession, whether arising from one or more transactions and whether or not earned by performance.

Utility accounts likely fall within this definition of an account receivable, and the six-year statute of limitations would therefore apply to amounts that are charged by the utility but not paid by its customers. But utilities generally have faster, more efficient ways of collecting delinquencies through disconnection of service or filing real property liens (note that the availability of these remedies vary by type of utility and type of municipal entity). Those options, if used correctly, will often resolve the delinquency without the need to file an action to recover an account receivable.

If a utility finds it has underbilled a customer over an extended period of time, can it simply back bill the customer and apply the six-year statute of limitations? The answer is “no,” based on the unreported Washington Court of Appeals decision of City of Snohomish v. Seattle-Snohomish Mill Co., Inc., 118 Wn. App. 1032 (2003). The utility suspected underbilling between 1990 and 1998 but did not issue a back bill for the period in question until 2001. The court rejected the notion that a utility seeking to collect for unbilled undercharges can unilaterally extend the statute of limitations until it prepares a bill for the uncharged amount, even if it knew much earlier that it had suffered a compensable injury. Under such a rule, there would be no limit to how long parties could extend the limitations period for an unbilled debt.

Instead the court ruled that the discovery rule applies to the utility and that the statute of limitations begins to run when the utility, in the exercise of reasonable diligence, should have known of the underbilling. The court questioned whether the six-year statute of limitations applies to “unbilled undercharges,” but that was prior to a 2007 amendment to RCW 4.16.040(2), which clarified and expanded the definition of “account receivable.” At any rate, under the reasoning of Snohomish, the applicable statute of limitations will run from the time the utility should have known of the underbilling, regardless of when the utility back bills the amount of the undercharge.

Conclusion

Long-term utility billing errors can raise difficult issues for utilities that should be reviewed on a case-by-case basis with legal counsel. The Snohomish case is unpublished, which means it does not have precedential value in Washington courts. Nevertheless, it illustrates the need for caution and careful analysis when attempting to resolve long-term utility billing problems such as under or overcharges.