1. The district court has jurisdiction of a suit by a street
railway company to enjoin a city from requiring it to accept an
unremunerative rate of fare, and has power to determine whether the
right to enforce the rate in question is secured to the city by
contract. P.
255 U. S.
555.
2. In view of a provision of the Texas Constitution (Art. I, 17)
that
"no irrevocable or uncontrollable grant of special privileges or
immunities shall be made, but all privileges and franchises granted
by the legislature, or created under its authority shall be subject
to the control thereof,"
held that an ordinance of the City of San Antonio which
extended the rights, privileges, and franchises of certain street
railway companies and fixed the rate of fare should not be
construed and could not operate as a contract between them and the
city binding them to that rate after it became unremunerative and
in effect confiscatory. P.
255 U. S. 555.
3.
Held also that, even if the city gained power to
make such contracts through a later amendment of the state
constitution, the existing ordinance was not thereby converted, for
the future, into a contract. P.
255 U. S.
555.
4. A maximum fare limitation in a street railway franchise,
granted by a city which was vested with the rate regulating power
and forbidden to restrict it by contract, should be taken as in
exercise of the regulating power, and not as imposing a unilateral
contract or condition upon the grantee to observe the limitation
even though it become confiscatory, and especially so where the
case exhibits no actual intention of the parties to bind the
grantee and not the city. P.
255 U. S.
556.
5. Where a city consented to a consolidation of a gas and
electric with a street railway corporation upon condition that
their existing obligations should be preserved, and where the
obligation of the street railway to collect no more than a fare
fixed by ordinance arose under and had long been attributed in
practice to the city's regulating
Page 255 U. S. 548
power, and that power was expressly reserved as to gas and
electricity in the ordinance permitting the consolidation,
held that a contract binding the consolidated company to
the fare limitation after it became confiscatory could not be
implied. P.
255 U. S.
556.
Affirmed.
This was a suit by the appellee to enjoin the appellants from
enforcing an ordinance limiting the fare chargeable on its
streetcar lines to an amount which had ceased to yield adequate
returns and had become confiscatory. The court below overruled a
motion to dismiss the bill (257 F. 467) and, on final hearing,
granted the relief prayed. The facts are given in the opinion.
MR. CHIEF JUSTICE WHITE delivered the opinion of the Court.
The decree below enjoined the City of San Antonio from enforcing
a five-cent fare against the Public Service Company, operating
street railway lines in that city, on the ground that the right to
enforce such rate was not secured to the city by contract, and such
enforcement was beyond the power of the city, because of the
confiscation of the property of the railway company which would
result, in violation of the Fourteenth Amendment to the
Constitution of the United States.
The consideration we must give the subject will be clarified by
outlining the origin and development of the controversy.
In March, 1899, the City of San Antonio, by ordinance, extended
to July 1, 1940,
"the rights, privileges and franchises heretofore granted to and
existing in the San
Page 255 U. S. 549
Antonio Gas Company, Mutual Electric Light Company, San Antonio
Street Railway Company, and the San Antonio Edison Company."
The ordinance provided, among other things, that the two
companies last named, which operated street railways in the city,
"shall charge five cents fare for one continuous ride over any one
of their lines, with one transfer to or from either line to the
other."
In April, 1900, all the property of the two railway companies
was sold under a decree or a state court to the San Antonio
Traction Company, and that company, with the approval of the city,
thereafter controlled and carried on both lines.
In 1903, the state enacted a half-fare law making it the duty of
the Traction Company to carry school children and students for half
fare, and subsequently an ordinance was passed by the city in
furtherance of this law. The company refusing to carry out this
legislation on the ground that it impaired the obligation of its
contract as to rate of fare resulting from the ordinance of 1899,
in violation of the constitutions of the state and of the United
States, a suit by mandamus to compel it to do so was begun by an
individual, and, from a ruling adverse to the company's contention,
the case was taken to the court of civil appeals. That court held
that it was unnecessary to consider whether the rate requirement
was a contract, because, as it was adopted long after the provision
of the state constitution that
"no irrevocable or uncontrollable grant of special privileges or
immunities shall be made, but all privileges and franchises granted
by the legislature or created under its authority shall be subject
to the control thereof,"
it was necessarily to that extent restricted, and therefore left
the state free, within the limits of the restriction, to exert the
authority to regulate. As a result, the half-fare law was upheld,
obviously upon the conclusion that it was within the power
Page 255 U. S. 550
to regulate as restricted by the constitutional provision
(Tex.Civ.App., 81 S.W. 106).
Because of the federal question, the case was brought to this
Court and the decree was affirmed substantially on the ground which
had controlled the decision below. In addition, however, the court
was careful to point out that the state constitution prohibited a
rate regulation which was confiscatory, but that, in view of the
absence of all averment that the rate in question was confiscatory,
it was unnecessary to deal with that subject.
San Antonio
Traction Co. v. Altgelt, 200 U. S. 304.
Presumably under the power to regulate as thus established, the
city thereafter passed, and the Traction Company carried out, an
ordinance imposing the duty of free transportation of policemen and
firemen.
In 1912, the state constitution was amended so as to authorize
cities having more than 5,000 inhabitants, by vote of their
electors, to amend their charters or adopt new ones, subject to the
limitation that the charters should not contain any provision
inconsistent with the Constitution or general laws of the
state.
In the meantime, the two companies, gas and electric, dealt with
in the ordinance of 1899 were consolidated and became the San
Antonio Gas & Electric Company, and, in 1917, appellee, the San
Antonio Public Service Company, petitioned the city government to
consent to its acquisition of all the rights and property of the
San Antonio Traction Company and of the San Antonio Gas &
Electric Company, thus proposing to bring under one control the
four corporations dealt with in the ordinance of 1899. The city
consented by an ordinance which expressly subjected the Public
Service Company to all the limitations, duties, and obligations
which rested upon the Traction Company and the Gas & Electric
Company. The ordinance further provided that:
"In accepting the provisions of this ordinance, the
Page 255 U. S. 551
San Antonio Public Service Company agrees that the city shall
hereafter have the right to pass all ordinances not in direct
conflict with the laws of this state fixing and regulating the
rates, prices, and terms at which gas and electricity shall be
furnished for public and private purposes to the city and its
inhabitants."
This was followed by provisions requiring the keeping of such
accounts by the Public Service Company in its gas and electric
departments as would enable the city to exercise the power to fix
rates as to gas and electricity. The ordinance having been accepted
by the Public Service Company, the consolidation was
accomplished.
At and for a long time prior to the consolidation, the penal
code of the city contained a provision, accompanied by a penalty
for its violation, forbidding, except during certain hours of the
night, the charging of more than a five-cent fare within the city
limits. Shortly after the approval of the consolidation, another
ordinance was passed forbidding and penalizing any person, firm or
corporation, enjoying franchises within the city limits, or their
agents or employees, from charging more than the rate then charged
and collected without obtaining the permission of the city. In
conformity with this last-mentioned ordinance, the Public Service
Company, in August, 1918, applied to the city for permission to
increase its rate of fare from five to six cents based upon the
ground that, although the five-cent fare was remunerative at the
time it was fixed, it had, by the increase in cost of operation in
practically every department, become wholly insufficient for that
purpose, and could not be continued without confiscating the
property of the company. After a hearing, the city, by an ordinance
reciting that as the company was bound by the 40-year franchise
granted in 1899 to charge five-cent fare, the city did not feel
authorized nor called upon to set it aside, and furthermore that
the hearing had shown no necessity for
Page 255 U. S. 552
the change in rate asked, refused the company's request, at the
same time prohibiting, under a penalty which was stated, any
person, firm, or corporation operating any street railway within or
partly within the city from charging more than a five-cent
fare.
Thereupon the company commenced this suit by filing its bill to
enjoin the city from enforcing the five-cent fare ordinance. The
bill, after alleging the adequacy of the rate of five cents when
originally fixed in 1899, contained the amplest averments
concerning its present confiscatory character. The prayer was for a
temporary injunction restraining the enforcement of the five-cent
fare ordinances and from interfering with the company in putting in
a seven-cent fare instead, and from enforcing the ordinances which
forbade a change of fare. It was prayed that, if the company was
not permitted to put in effect the seven-cent fare, the court would
itself establish that rate or such other as it might find necessary
to enable the company to pay its operating expenses and to earn a
reasonable sum on its investment, and that a permanent injunction
securing the results prayed be awarded.
The city moved to dismiss the bill for want of jurisdiction
because it presented no substantial federal question, as it showed
on its face that the parties were bound by the five-cent fare
provision of the franchise ordinance as a contract subject to be
enforced even though the rate was confiscatory, and moreover
because the bill otherwise stated no ground for equitable relief.
The court overruled the motion. It reviewed the history of the case
and decided that, in view of the controversy as to contract growing
out of the enforcement of the half-fare law terminated by the
ruling of this Court in the
Altgelt case, as well as of
all the subsequent dealings between the parties, the existence of a
contract as to the five-cent fare was not established, and hence
the attempt to enforce it, because of the confiscation to result,
gave a cause of
Page 255 U. S. 553
action under the Constitution of the United States.
San
Antonio Public Service Co. v. San Antonio, 257 F. 467.
The city then answered, reiterating the grounds of its previous
challenge to the jurisdiction and asserting that the franchise
ordinance rate was based upon a contract resulting from that
ordinance and from the action taken at the time and in furtherance
of the consolidation. It further asserted an estoppel to deny the
contract arising from various acts of the city and the corporation
or its predecessors from the time of the ordinance in 1899 to the
bringing of the suit 1918. Moreover, disputing the confiscatory
character of the five-cent fare, it claimed the right to compel its
continued exaction in virtue of its general governmental authority
to regulate the fares of street railways companies.
The case was referred to a master to report on the facts and the
law. Before the master, a hearing was had, followed by an elaborate
report on both subjects. As the action of the court overruling the
exception to its jurisdiction had adversely disposed of the
question of the existence of the contract concerning the five-cent
fare, the master put that subject out of view, and therefore
reported only on the facts as to the confiscatory character of the
five-cent rate and of the power of the court, under the assumption
that it was confiscatory, to restrain its enforcement.
A few words from the report will suffice to make manifest the
conclusion of the master. He said:
"The rate prescribed by the ordinance is insufficient, because
of the changed conditions since the rate was fixed 20 years ago, to
enable the company to earn a fair return, but I have reached the
conclusion that to admit the contention of the company would be for
the court to exercise a power it does not possess. . . . A rate,
reasonable when fixed, does not become unreasonable, from the
judicial point of view, because of changed conditions. "
Page 255 U. S. 554
Although the Public Service Company excepted to the conclusion
of law thus stated and to some of the separate conclusions of fact
made by the master, no exception whatever to the report was made by
the city, and the case therefore went to the court upon the
admitted confiscatory character of the rate, upon the question of
contract, and upon the power of the court, if no such contract
existed, to restrain the confiscation which would result from
giving effect to the rate. Adhering to its previous ruling, the
court declared that it had jurisdiction to prevent the admitted
confiscation which would result from the five-cent rate.
Concluding, however, that, as the court was not a primary
ratemaking authority, it would not fix a reasonable rate to replace
the five-cent rate, the enforcement of which would be enjoined, and
expressing the hope that the parties might agree upon such a rate,
it announced that it would postpone shaping the final decree for
that purpose.
Some weeks afterward, the final decree was entered. It enjoined
the city from interfering with the complainant in substituting a
seven-cent fare for the five-cent fare, and besides enjoined the
city from enforcing the various ordinances complained of in the
bill, prohibiting and punishing the charging of a higher rate than
five cents. The decree reserved, however, the right to the city to
ask relief whenever, because of a change in conditions, the
five-cent fare should cease to be confiscatory. In addition, the
enforcement of the city ordinance imposing the half-fare rate for
school children was enjoined, although the continued enforcement of
the state half-fare law, which had been upheld in the
Altgelt case, was expressly declared not to be restrained.
On the direct appeal of the city because of the constitutional
question involved, we are called upon, as at the outset stated, to
determine whether error was committed in the decree thus
rendered.
Page 255 U. S. 555
That, in view of the admitted fact of confiscation, the court
had power to deal with the subject we are of opinion is too clear
for anything but statement. And we think it is equally clear that,
as the right to regulate gave no power whatever to violate the
Constitution by enforcing a confiscatory rate, a result which could
only be sustained as a consequence of the duty to pay such rate
arising from the obligations of a contract, it follows that the
solitary question to be considered is whether a contract existed
empowering the city to enforce the confiscatory rate.
Primarily, the answer to that question must depend upon whether
the ordinance of 1899 fixing the five-cent rate was a contract.
That it was not, and could not be, we are of opinion is the
necessary result of the provision of § 17, Article I, of the state
constitution, existing in 1899, prohibiting "any irrevocable or
uncontrollable grant of special privileges," etc., when considered
in the light of the irrevocable and uncontrollable elements which
must necessarily inhere in the ordinance of 1899 to give it the
contract consequence relied upon. Indeed, this result is
persuasively established by the ruling in the
Altgelt case
to the effect that, if the contract right were conceded, there
would, in view of the constitutional restriction, be such an
inevitable conflict between that right and the dominant power to
regulate as to render the contract right inoperative, and therefore
to cause it to perish from the mere fact of admitting its conflict
with the authority to regulate.
But it is urged that as, by the amendment to the state
constitution of 1912, the city was endowed with authority broad
enough to enable it to contract in granting a street railway
franchise concerning the rate of fare to be charged, dissenthralled
from the limitation of § 17, Article I, of the state constitution,
it follows that the franchise ordinance must, after that date, be
viewed as such a contract, and treated accordingly. But as no
contract between the
Page 255 U. S. 556
city and the Traction Company, made after the constitutional
amendment in 1912 concerning the fare in question, is referred to,
it is plain that even if the proposition as to power of the city
after 1912 be, for the sake of the argument, conceded, it is
irrelevant to the case we are considering.
And this is true also of the suggestion, made in argument, that,
although no contract was possible under the constitutional
restriction which would bind the city not to lower the rate,
nevertheless there was a unilateral contract or condition,
resulting from the granting of the franchise, which bound the
railway company to the franchise rate, since again there is not the
slightest suggestion of any attempt on the part of the parties
consciously to produce such a condition. But besides, the error
underlying the proposition is not far to seek. The duty of an owner
of private property used for the public service to charge only a
reasonable rate, and thus respect the authority of government to
regulate in the public interest, and of government to regulate by
fixing such a reasonable rate as will safeguard the rights of
private ownership, are interdependent and reciprocal. Where,
however, the right to contract exists, and the parties, the public
on the one hand and the private on the other, do so contract, the
law of the contract governs both the duty of the private owner and
the governmental power to regulate. Were, therefore, as in the case
supposed in the argument, the regulating power of government wholly
uncontrolled by contract, it would follow that that power would be
required to be exerted, and hence the supposed condition operating
upon the private owner would be nugatory. Such a case really
presents no question of a condition, since it resolves itself into
a mere issue of the exercise by government of its regulatory
power.
Further, however, it is urged that, as, at the time of the
consolidation in 1917, the powers of the city were not
Page 255 U. S. 557
limited by the constitutional provision referred to, the
necessary effect of the obligations which the Public Service
Company came under was to convert the five-cent fare ordinance into
a contract conferring the right to enforce it, even though
confiscatory. But that question rests upon mere implications, as no
express provision to that effect is pointed out. Moreover, its
entire want of merit not only results from that fact, but from the
unwarranted character of the implications upon which it is based.
They proceed upon assumptions that, because the city exacted as a
condition for consenting to the consolidation, that the existing
obligations and duties of the corporations should be preserved, a
contract as to the five-cent fare arose. The error of the
proposition in all its aspects is equally apparent from a broader
view, since, from the date of the final decision in the
Altgelt case up to the time when the contention as to
confiscation resulting from the changed conditions arose, the acts
and dealings of the parties unmistakably indicated the purpose to
exert the authority derived from the power to regulate, to the
exclusion of the limitations resulting from the right of contract
which had been unsuccessfully asserted by the Traction Company in
the
Altgelt litigation. This deduction arises not only
from the exertion by the city, after the finality of the
Altgelt litigation, of the power to compel the carrying of
policemen and firemen without charge, but also from the general
limitations expressed in ordinances making no reference whatever to
contract rights, and asserting the right of the city to give or not
to give consent to a change of rate.
In fact, the city ordinance expressing the consent to the
consolidation makes this clear, since, having, in the second
section, imposed upon the Public Service Company "all the
limitations, duties, contracts, forfeitures and obligations imposed
on or required of either of said companies at this time," yet
expressly, in the third section, it
Page 255 U. S. 558
stipulated for the right of the city to regulate the charges for
the gas and electric services, and imposed upon the Public Service
Company the duty of keeping the accounts as to such services in
such a manner as to enable this to be done. Light is necessarily
thrown on the purpose of this provision by considering that the
right of the Public Service Company to assert that the maximum
rates fixed by the ordinance of 1899 in favor of the gas and
electric companies were contracts limiting the power of the city to
regulate, had not been determined adversely to those companies, as
had been done as to the Traction Company by the
Altgelt
case -- a view the force of which will be felt by recalling that,
by the amendment to the city's charter which we have stated, the
constitutional limitation which led to the deflection of the
contract clause in the
Altgelt case was no longer
applicable.
The bold contrast between the ordinance referred to and the
statement made by the city in the ordinance refusing the increase
in rate to meet the confiscation, because of the assumed restraint
put by an existing contract, tends to throw abundant light on the
situation. The fact is that all the contentions of the city as to
implication of contract as to the 1899 rates but illustrate the
plainly erroneous theory upon which the entire argument for the
city proceeds -- that is, that limitations by contract upon the
power of government to regulate the rates to be charged by a public
service corporation are to be implied for the purpose of sustaining
the confiscation of private property.
Home Telephone Co. v. Los
Angeles, 211 U. S. 265,
211 U. S. 273,
and cases cited;
Milwaukee Electric Railway Co. v. Wisconsin R.
Co. Commission, 238 U. S. 174,
238 U. S.
180.
Affirmed.