I. In the absence of a contract obligation, the grantee of a
franchise to supply the public with electricity or gas cannot
constitutionally be required by the state or its agencies to
observe rates which in effect are confiscatory of its property. P.
255 U. S.
541.
2. The acceptance from a municipality of a franchise to supply
the public with gas or electricity for a term of years at specified
maximum rates does not bind the grantee with a contractual
obligation to charge no more if the rates become in effect
confiscatory where the law of the state (Iowa Code of 1897, § 720,
725) reposes in the municipality the continuing power to regulate
such rates and, that the public may be protected from improvident
bargains, forbids any abridgment of the power by ordinance,
resolution, or contract. P.
255 U. S.
542.
256 F. 929 reversed.
Page 255 U. S. 540
MR. CHIEF JUSTICE WHITE delivered the opinion of the Court.
At the time these suits were begun, the appellants were engaged
in supplying electricity or gas to the municipal corporations who
are the appellees. This service was being rendered by virtue of
ordinances conferring franchises to use the city streets during 25
years in two of the cases and 20 years in the other. The ordinances
contained a schedule of maximum rates. After they were in effect a
few years, the three suits which are before us were begun against
the cities with the object of preventing the enforcement
Page 255 U. S. 541
of the maximum rates specified in the ordinances on the ground
that such rates were so unreasonably low that their continued
enforcement would deprive the corporations of remuneration for the
services by them being performed, and in fact, if enforced, would
result in the confiscation of their property in violation of the
due process clause of the Fourteenth Amendment to the Constitution
of the United States. In the three cases, the court granted a
temporary injunction restraining the enforcement of the maximum
rates and allowed an order permitting, pending the suits, a higher
charge.
The cases were submitted upon the pleadings and without the
taking of testimony upon issues which presented the contention that
the ordinances were contracts, and therefore the maximum rates
which they fixed were susceptible of continued enforcement against
the corporations although their operation would be confiscatory. In
one opinion, applicable to the three cases, the court stated its
reasons for maintaining this view, but directed attention to the
fact that no proof had been offered concerning the confiscatory
character of the rates, and pointing out that, as such subject
might become important on appeal, it would be necessary to restore
the cases to the docket for proof in that regard unless the
situation was remedied by agreement between the parties. Thereupon,
the pleadings were amended so as to directly present, separately
from the other issues in the case, the right of the cities to
enforce the ordinance rates in consequence of the contracts without
reference to whether such rates were, in and of themselves,
confiscatory. Upon its opinion as to the existence of contracts and
the power to make them as previously stated, the court entered
decrees enforcing the ordinance rates which are now before us for
review because of the constitutional question involved.
Two propositions are indisputable: (a) that, although the
governmental agencies having authority to deal with
Page 255 U. S. 542
the subject may fix and enforce reasonable rates to be paid
public utility corporations for the services by them rendered, that
power does not include the right to fix rates which are so low as
to be confiscatory of the property of such corporations,
Reagan
v. Farmers' Loan & Trust Co., 154 U.
S. 362;
Smyth v. Ames, 169 U.
S. 466;
San Diego Land & Town Co. v.
Jasper, 189 U. S. 439,
189 U. S. 442;
Knoxville v. Knoxville Water Co., 212 U. S.
1,
212 U. S. 17;
Willcox v. Consolidated Gas Co., 212 U. S.
19,
212 U. S. 41;
Minnesota Rate Cases, 230 U. S. 352,
230 U. S. 434;
Ceder Rapids Gas Co. v. Cedar Rapids, 223 U.
S. 655;
Des Moines Gas Co. v. Des Moines,
238 U. S. 153;
Denver v. Denver Union Water Co., 246 U.
S. 178,
246 U. S. 194,
and (b) that where, however, the public service corporations and
the governmental agencies dealing with them have power to contract
as to rates, and exert that power by fixing by contract rates to
govern during a particular time, the enforcement of such rates is
controlled by the obligation resulting from the contract, and
therefore the question of whether such rates are confiscatory
becomes immaterial,
Freeport Water Co. v. Freeport,
180 U. S. 587,
180 U. S. 593;
Detroit v. Detroit City Ry. Co., 184 U.
S. 368;
Knoxville Water Co. v. Knoxville,
189 U. S. 434,
189 U. S. 437;
Cleveland v. Cleveland City Ry. Co., 194
U. S. 519;
Home Telephone Co. v. Los Angeles,
211 U. S. 265,
211 U. S. 273;
Minneapolis v. Minneapolis Street Ry. Co., 215 U.
S. 417;
Columbus Ry. Power & Light Co. v. City
of Columbus, 249 U. S. 399.
It follows that, as the rates here involved are conceded to be
confiscatory, they cannot be enforced unless they are secured by a
contract obligation. The existence of a binding contract as to the
rates upon which the lower court based its conclusion is therefore
the single issue upon which the controversy depends. Its solution
turns, first, upon the question of the power of the parties to
contract on the subject, and second, if they had such power,
whether they exercised it.
Page 255 U. S. 543
As to the first, assuming, for the sake of the argument only,
that the public service corporations had the contractual power, the
issue is: had the municipal corporations, under the law of Iowa,
such authority? Its possession must have been conferred, if at all,
by § 725 of the Iowa Code of 1897, which deals with that subject.
That statute came before the Supreme Court of Iowa for
consideration in the very recent case of
Town of Woodward v.
Iowa Railway & Light Co., 178 N.W. 549. That was a suit by
the Town of Woodward to compel the light company to continue to
furnish electric lighting at the rates fixed by the ordinance
conferring upon the company its franchise to maintain and operate
its plant in the town. The company resisted on the ground that the
rates had become confiscatory, and were not enforceable. Testimony
offered by the company to establish the confiscatory character of
the rates was objected to by the town, which asserted that the
acceptance by the company of the ordinance bound it by contract to
furnish the service at the rates therein prescribed whether or not
they were confiscatory, and that the evidence offered was therefore
immaterial. The evidence was received subject to the objection, and
the court, finding the rates to be confiscatory, sustained the
company's contention and dismissed the bill. Upon appeal by the
town, the supreme court, affirming the action of the trial court,
said:
"The defendant's franchise in the Town of Woodward was granted
in June, 1912, by ordinance duly enacted by the city council and
duly approved by vote of the electors, as required by § 720 of the
Code. Section 6 of the ordinance, which granted the franchise,
specified the rates to be charged by the defendant to consumers.
The term of the franchise was 25 years. The essence of the
plaintiff's contention is that the enactment of this ordinance
(including the franchise and the rates and the approval
Page 255 U. S. 544
of the same by the electors) and the practical acceptance of the
same by the utility corporation constituted a contract binding as
such both upon the town and upon the utility corporation. The
defendant resists this contention, and likewise denies that there
is any power conferred by statute upon the city council to enter
into contract on the subject of rates. The issue at this point is
the controlling one in the case. The question thus at issue is
answered by § 725 of the Code of 1897, which provides as
follows:"
"Sec. 725.
Regulation of Rates and Service. -- They
shall have power to require every individual or private corporation
operating such works or plant, subject to reasonable rules and
regulations, to furnish any person applying therefor, along the
line of its pipes, mains, wires, or other conduits, with gas,
water, light or power and to supply said city or town with water
for fire protection and with gas, water, light or power for other
necessary public purposes [and to regulate and fix the rent or
rates for water, gas, heat and electric light or power], . . . and
these powers shall not be abridged by ordinance, resolution or
contract.
*"
"It will be noted from the foregoing that the legislative power
to fix rates is conferred by this section upon the city council.
The legislative power thus conferred is a continuing one, and may
not be abridged or bartered away by contract or otherwise. . . .
There was a time in the history of our legislation when the right
of contract as to rates was conferred by statute upon the city
council. . . . By the revision and codification of 1897, the right
of contract as to rates for utilities of this character was
entirely eliminated, and the legislative
Page 255 U. S. 545
power to regulate rates was conferred upon the city council in
all cases. The reason for the change of method is obvious enough.
Under the contract method, the rights of the public were often
bartered away, either ignorantly or corruptly, and utility
corporations became empowered through the contractual obligations
to enforce extortionate rates. The net result of the progressive
legislation is found in our present § 725, whereby it is forbidden
to any existing city council to bind the city to any rate for any
future time. The power of regulating the rate is always in the
present city council. It must be said, therefore, that the rates
fixed by § 6 of the ordinance hereinbefore referred to were not
fixed by contract."
Indeed, the doctrine thus expounded was but a reiteration of the
rule of the Iowa law laid down in previous cases.
City of
Tipton v. Tipton Light & Heating Co., 176 Ia. 224;
Iowa Railway & Light Co. v. Jones Auto Co., 182 Ia.
982;
Town of Williams v. Iowa Falls Electric Co., 185 Ia.
493. And again, more recently, in
Ottumwa Railway & Light
Co. v. City of Ottumwa, 178 N.W. 905, the court referring to
the
Town of Woodward case and to the doctrine therein
announced based upon the significance of § 725 of the Code of 1897,
thus restated its former conclusion on that subject:
"That statute in positive terms forbids any abridgment of the
right to regulate and fix charges of service corporations named in
the statute, either by ordinance, resolution, or contract. No one
would now contend, in the teeth of the statute prohibition, that
there can be a valid contract fixing permanent rates. As to
corporations named in that statute, we have held repeatedly that
there can be no contracting that rates fixed for service shall not
be changed.
See Tipton v. Light Co., 176 Ia. 224;
Selkirk v. Gas Co., 176 N.W. 301.
And see San Antonio
Co. v. City, 257 F. 467. To like
Page 255 U. S. 546
effect is
Iowa Co. v. Jones, 182 Ia. 982. And, in the
last case, it is held that the fixing of maximum rates in a
franchise ordinance is therefore not a contract that such rates may
not be changed before the time stated in such ordinance has lapsed,
and that approval by the electors of rates in the franchise is
merely an approval of the rates fixed by the franchise as rates
temporarily settled, with the understanding that the same might be
changed either upward or downward."
The total want of power of the municipalities here in question
to contract for rates which is thus established, and the state
public policy upon which the prohibition against the existence of
such authority rests, absolutely exclude the existence of the right
to enforce, as the result of the obligation of a contract, the
concededly confiscatory rates which are involved, and therefore
conclusively demonstrate the error committed below in enforcing
such rates upon the theory of the existence of contract. And indeed
the necessity for this conclusion becomes doubly manifest when it
is borne in mind that the right here asserted to contract in
derogation of the state law and of the rule of public policy
announced by the court of last resort of the state is urged by
municipal corporations whose every power depends upon the state
law.
Covington v. Kentucky, 173 U.
S. 231,
173 U. S. 241;
Worcester v. Worcester Street Ry. Co., 196 U.
S. 539,
196 U. S. 548;
Braxton County Court v. West Virginia, 208 U.
S. 192;
Englewood v. Denver & South Platte Ry.
Co., 248 U. S. 294,
248 U. S. 296;
Pawhuska v. Pawhuska Oil Co., 250 U.
S. 394,
250 U. S.
399.
Decrees reversed, and causes remanded for further
proceedings in conformity with this opinion.
* The words in brackets are found in the section, but are not
embraced in the provisions quoted by the court, although, as shown
by the language of the court as to the rate provision, they were
early taken into view and applied in construing the statute.