Only the legislature of a state, or a municipality specifically
authorized thereto by the legislature, can surrender by contract a
governmental power such as fixing rates. To grant a corporation the
right to charge a specified rate for a specified
Page 211 U. S. 266
time suspends for such period the governmental power of fixing
and regulating rates, and in construing a franchise, all doubts,
both as to existence of contract and authority to make it, must be
resolved against such suspension of power.
Whether an inviolable contract for rates exists must be
determined in each case on the particular facts involved; even
slight differences may turn the balance.
A power given by the state to one of its municipalities to "fix
and determine rates" does not authorize that municipality to
abandon the power and to irrevocably establish rates for the entire
period of a franchise.
Rate regulation is a legislative, and not a judicial, function,
and
quaere whether notice and hearing are necessary to
constitute due process of law in fixing rates. Where notice and
hearing are indispensable to due process of law, even though the
charter does not require it, an ordinance will not be declared
unconstitutional at the instance of parties who actually had notice
and an opportunity to be heard, as depriving them of property
without due process of law within the meaning of the Fourteenth
Amendment.
In this case, objections to a municipal ordinance requiring a
telephone company to report expenditures and receipts are
untenable.
A city council is not disqualified from acting in rate
regulation because the city is a heavy ratepayer or because the
members might be politically affected by their action.
The rule that every presumption is in favor of the validity of
legislation applies to a city ordinance, and it will not be held to
be unconstitutional within the meaning of the Fourteenth Amendment,
as denying the equal protection of the laws, where the party
attacking it as imposing unequal rates upon it does not clearly
show an improper classification.
This Court will not consider the legality or effect of a
provision in a city charter for submission of ordinances adopted by
the common council to the people on the petition of a specified
number of voters when the ordinance involved was not so
submitted.
The ordinances of the City of Los Angeles fixing telephone rates
held not to be unconstitutional either as impairing the
obligation of the contract contained in the franchise, as depriving
the corporation affected of its property without due process of law
or as denying it the equal protection of the law.
155 F. 554 affirmed.
The facts are stated in the opinion.
Page 211 U. S. 270
MR. JUSTICE MOODY delivered the opinion of the Court.
This is a suit in equity brought in the circuit court of the
United States by the appellant, a telephone company, against the
City of Los Angeles and its officers. The object of the suit is to
restrain the enforcement of certain ordinances which fixed the
rates to be charged for telephone service; required every person,
firm, or corporation supplying telephone service to furnish
annually to the city council a statement of the revenue from, and
expenditures in, the business, and an itemized inventory of the
property used in the business, with its cost and value, and
provided a penalty for charges in excess of the rates fixed and for
failure to furnish the required statements. The defendants demurred
to the bill, the demurrer was sustained, and an appeal was taken
directly to this Court on the constitutional questions, which will
be stated.
The ordinances complained of were enacted by virtue of the
powers contained in § 31 of the city charter, which is as
follows:
"(Sec. 31.) The Council shall have power, by ordinance, to
regulate and provide for lighting of streets, laying down gas
pipes, and erection of lamp-posts, electric towers, and other
apparatus, and to regulate the sale and use of gas and electric
Page 211 U. S. 271
light, and fix and determine the price of gas and electric
light, and the rent of gas meters within the city and regulate the
inspection thereof, and to regulate telephone service, and the use
of telephones within the city, and to fix and determine the charges
for telephones and telephone service and connections, and to
prohibit or regulate the erection of poles for telegraph,
telephone, or electric wire in the public grounds, streets, or
alleys, and the placing of wire thereon, and to require the removal
from the public grounds, streets, or alleys of any or all such
poles, and the removal and placing under ground of any or all
telegraph, telephone, or electric wires."
It was decided by the judge of the court below, and is agreed by
the parties, that this section of the charter conferred upon the
City Council, in conformity with the Constitution and laws of the
State of California, the power to prescribe charges for telephone
service. Not doubting the correctness of this view, we accept it
without extended discussion. The power to fix, subject to
constitutional limits, the charges of such a business as the
furnishing to the public of telephone service is among the powers
of government, is legislative in its character, continuing in its
nature, and capable of being vested in a municipal corporation.
The company, however, insists that the city, having the
authority so to do, has contracted with it that it may maintain the
charges for service at a specified standard, and that, as the rates
prescribed in the ordinances complained of are less than that
standard, the ordinances therefore impair the obligation of the
contract, in violation of the Constitution of the United States.
This is the first question to be considered, and the facts out of
which the contention arises are alleged in the bill and admitted by
the demurrer.
The company obtained its franchise under the provisions of a
statute of the state enacted March 11, 1901, Stat. 1901, p. 265,
[
Footnote 1] which was later
than the adoption of § 31 of the city charter. This statute
provides that, among other franchises,
Page 211 U. S. 272
the franchise "to erect or lay telephone wires . . . upon any
public street or highway" shall be granted by municipal
corporations only upon the conditions prescribed in the act. The
conditions enumerated are that an application for the franchise
shall be filed with the governing body of the municipality, of
which advertisement, in the discretion of the city council, shall
be made; that the advertisement must describe the character of the
franchise to be granted and state that it will be sold to the
highest bidder, who must pay annually to the municipality, after
five years, two percent of the gross annual receipts of the
business; that the franchise shall be struck off to the highest
bidder, and that a bond must be given by the purchaser to secure
the performance of "every term and condition" of the franchise.
There are other provisions not material here. By proceedings
conforming to this statute, a franchise to construct and operate a
telephone system for fifty years was sold to M. Adrian King, which,
by assignment, assented to by the city, came into the hands of the
plaintiff company, which constructed the works and has since
operated them. The franchise was granted by an ordinance. In the
view we take of the case, we need to do more than state very
briefly the main features of the ordinance. It grants a franchise
for fifty years, which is to be enjoyed in accordance with terms
and conditions named, stipulates for certain free service for the
city, and the payment to it, after five years, of two percent of
the gross receipts, and provides that the charges for service shall
not exceed specified amounts.
This ordinance, enacted by the city council, which exercises the
legislative and business powers of the city and, as has been shown,
the charter power of regulating telephone service and of fixing the
charges, contains, it is contended, the contract whose obligation
the subsequent ordinances fixing lower rates impaired. Two
questions obviously arise here. Did the city council have the power
to enter into a contract fixing, unalterably, during the term of
the franchise, charges for telephone service, and disabling itself
from exercising the charter
Page 211 U. S. 273
power of regulation? If so, was such a contract in fact made?
The first of these two questions calls for earlier consideration,
for it is needless to consider whether a contract in fact was made
until it is determined whether the authority to make the contract
was vested in the city. The surrender, by contract, of a power of
government, though in certain well defined cases it may be made by
legislative authority, is a very grave act, and the surrender
itself, as well as the authority to make it, must be closely
scrutinized. No other body than the supreme legislature (in this
case, the legislature of the state) has the authority to make such
a surrender unless the authority is clearly delegated to it by the
supreme legislature. The general powers of a municipality or of any
other political subdivision of the state are not sufficient.
Specific authority for that purpose is required. This proposition
is sustained by all the decisions of this Court, which will be
referred to hereafter, and we need not delay further upon this
point.
It has been settled by this Court that the state may authorize
one of its municipal corporations to establish, by an inviolable
contract, the rates to be charged by a public service corporation
(or natural person) for a definite term, not grossly unreasonable
in point of time, and that the effect of such a contract is to
suspend, during the life of the contract, the governmental power of
fixing and regulating the rates.
Detroit v. Detroit Citizens'
St. Ry. Co., 184 U. S. 368,
184 U. S. 382;
Vicksburg v. Vicksburg Water Works Co., 206 U.
S. 496,
206 U. S. 508.
But for the very reason that such a contract has the effect of
extinguishing
pro tanto an undoubted power of government,
both its existence and the authority to make it must clearly and
unmistakably appear, and all doubts must be resolved in favor of
the continuance of the power.
Providence Bank v.
Billings, 4 Pet. 514,
29 U. S. 561;
Railroad Commission Cases, 116 U.
S. 307,
116 U. S. 325;
Vicksburg &c. Railroad Co. v. Dennis, 116 U.
S. 665;
Freeport Water Co. v. Freeport City,
180 U. S. 587,
180 U. S. 599,
180 U. S. 611;
Stanislaus County v. San Joaquin C. & I. Co.,
192 U. S. 201,
192 U. S. 211;
Metropolitan Street Ry. Co. v. New York, 199 U. S.
1.
And see 207 U. S. Light
& Gas
Page 211 U. S. 274
Co. v. Hutchinson, 207 U. S. 385. It
is obvious that no case, unless it is identical in its facts, can
serve as a controlling precedent for another, for differences,
slight in themselves, may, through their relation with other facts,
turn the balance one way or the other. Illustrations of the truth
of this may be found in the cases of
Freeport Water Co. v.
Freeport, supra; Rogers Park Water Co. v. Fergus, 180 U.
S. 624, and
Knoxville Water Co. v. Knoxville,
189 U. S. 434,
where no authorized contract was found, as contrasted with
Detroit v. Detroit Citizens' St. Ry. Co. supra, and
Cleveland v. Cleveland City Ry. Co., 194 U.
S. 517, where a contrary conclusion was reached.
The facts in this case which seem to us material upon the
questions of the authority of the city to contract for rates to be
maintained during the term of the franchise are as follows: the
charter gave to the council the power
"by ordinance . . . to regulate telephone service and the use of
telephones within the city, . . . and to fix and determine the
charges for telephones, and telephone service and connections."
This is an ample authority to exercise the governmental power of
regulating charges, but it is no authority to enter into a contract
to abandon the governmental power itself. It speaks in words
appropriate to describe the authority to exercise the governmental
power, but entirely unfitted to describe the authority to contract.
It authorizes command, but not agreement. Doubtless an agreement as
to rates might be authorized by the legislature to be made by
ordinance. But the ordinance here described was not an ordinance to
agree upon the charges, but an ordinance "to fix and determine the
charges." It authorizes the exercise of the governmental power, and
nothing else. We find no other provision in the charter which by
any possibility can be held to authorize a contract upon this
important and vital subject. Those relied on for that purpose are
printed in the margin. [
Footnote
2]
Page 211 U. S. 275
This being the condition of the charter powers, the act of 1901,
under which the company derived its franchise, was passed. The
first section of that act provided that franchises "shall be
granted upon the conditions in this act provided,
and not
otherwise." Here is an emphatic caution against reading
Page 211 U. S. 276
into the act any conditions which are not clearly expressed in
the act itself. In view of this language, it cannot be supposed
that the legislature intended that so significant and important an
authority as that of contracting away a power of regulation
conferred by the charter should be inferred from the act in the
absence of a grant in express words. But there is no such grant.
The argument of the appellant that the authority was granted is
based upon the provisions of the act that an application for the
franchise must be filed, and, in the discretion of the Council,
published; that the publication must state "the character of the
franchise;" that the city is entitled to a percentage of the
receipts; that the grantee must give bond to perform "every term
and condition of such franchise;" that no condition shall be
inserted which restricts competition or favors one person against
another, and that the franchise must be sold to the highest bidder.
It is urged that, though authority to contract for the maintenance
of rates is not expressed in the act, it is necessarily implied
from these provisions. But we are of the opinion that there is no
such necessary implication, even if anything less than a clear and
affirmative expression would be sufficient foundation upon which to
rest an authority of this nature. The decisions of this Court, upon
which the appellant relies, where a contract of this kind was found
and enforced all show unmistakably legislative authority to enter
into the contract. In
Los Angeles v. Los Angeles City Water
Co., 177 U. S. 558, the
contract was in specific terms ratified and confirmed by the
legislature. In
Detroit v. Detroit Citizens' St. Ry. Co.,
184 U. S. 368, the
contract was made in obedience to an act of the legislature that
the rates should be "established by agreement between said company
and the corporate authorities." The opinion of the Court, after
saying (p.
184 U. S.
382):
Page 211 U. S. 277
"It may be conceded that clear authority from the legislature is
needed to enable the city to make a contract or agreement like the
ordinances in question, including rates of fare,"
pointed out (p.
184 U. S. 386)
that "it was made matter of agreement by the express command of the
legislature." In
Cleveland v. Cleveland City Ry. Co.,
194 U. S. 517, the
legislative authority conferred upon the municipality was described
in the opinion of the Court (p.
194 U. S. 534)
as
"comprehensive power to contract with street railway companies
in respect to the terms and conditions upon which such roads might
be constructed, operated, extended, and consolidated."
In
Cleveland v. Cleveland Electric Ry. Co.,
201 U. S. 529,
precisely the same authority appeared. In
Vicksburg v.
Vicksburg Water Works Co., 206 U. S. 496, the
Court said (p.
206 U. S.
508):
"The grant of legislative power upon its face is unrestricted,
and authorizes the city 'to provide for the erection and
maintenances of a system of waterworks to supply said city with
water, and to that end to contract with a party or parties who
shall build and operate waterworks.'"
Moreover, in this case, the construction of the Supreme Court of
Mississippi of its own statutes was followed. On the other hand, it
was held in
Freeport Water Co. v. Freeport, 180 U.
S. 587, that two acts of the legislature, passed on
successive days, authorizing municipalities to "contract for a
supply of water for public use for a period not exceeding thirty
years," and to authorize private persons to construct waterworks
"and maintain the same at such rates as may be fixed by ordinance,
and for a period not exceeding thirty years," did not confer an
authority upon the municipality to contract that the water company
should be exempt from the exercise of the governmental power to
regulate rates. In this case, too, the construction of the highest
court of the state was followed.
See Rogers Park Water Co. v.
Fergus, supra. All these cases agree that the legislative
authority to the municipality to make the contract must clearly and
unmistakably appear. It does not so appear in the case at bar. The
appellant has failed to show that the city had legislative
authority to make
Page 211 U. S. 278
a contract of exemption from the exercise of the power of
regulation conferred in the charter. It therefore becomes
unnecessary to consider whether such a contract in fact was made.
The appellant's contention that there was a violation of the
obligation of its contract must therefore be denied.
The appellant also contends that the ordinances fixing rates are
wanting in due process of law, and therefore violate the Fourteenth
Amendment of the Constitution of the United States, because the
section (31) of the charter, under whose authority they were
enacted, does not expressly provide for notice and hearing before
action. But rate regulation is purely a legislative function and,
even where exercised by a subordinate body upon which it is
conferred, the notice and hearing essential in judicial proceedings
and, for peculiar reasons, in some forms of taxation (
see
Londoner v. Denver, 210 U. S. 373),
would not seem to be indispensable. It may be that the authority to
regulate rates, conferred upon the city council by § 31 of the
charter, is not an authority, arbitrarily, and without
investigation, to fix rates of charges, and that, if charges were
fixed in that manner, the act would be beyond the authority of the
Council. It is not unlikely that the California courts would give
this construction to the ordinance.
San Diego Water Co. v. San
Diego, 118 Cal. 556. Acting within the authority thus limited,
it would seem that the character and extent of the investigation
made and notice and hearing afforded, in the exercise of this
legislative function, would be left to the discretion of the body
exercising it. It must not be forgotten that, presumably, the
courts of the states, and certainly the courts of the United
States, are open to those who complain that their property has been
confiscated by an act of regulation of this kind, and that the
latter courts will, under all circumstances, determine for
themselves whether such confiscation exists. But we need not now
decide whether notice and hearing were required. Both were given in
this case. An ordinance of the city provided that the rates should
be fixed at a regular and special meeting of the city council
Page 211 U. S. 279
held during the month of February of each year, and another
ordinance, as has been shown, required the telephone company to
render annually, in the month of February, to the city council, a
statement of its receipts, expenditures, and property employed in
the business -- facts which would be material on the question of
fixing reasonable rates. This shows that a sufficient notice and
hearing were afforded to the appellant, if it had chosen to avail
itself of them, instead of declining to furnish all information, as
it did. If notice and an opportunity to be heard were
indispensable, which we do not decide, it is enough that, although
the charter be silent, such notice and hearing were afforded by
ordinance, as in this case. So it was held in
Paulsen v.
Portland, 149 U. S. 30,
149 U. S. 38,
and it was held in
San Diego Land & Town Co. v. National
City, 174 U. S. 739,
that the kind of notice and hearing (in that case provided by
statute) which the ordinance in this case afforded was sufficient.
For these reasons the contention of the appellant on this part of
the case is denied.
We do not understand that an objection to the ordinance
requiring the statement of the appellant's receipts, expenditures,
and property is made, except insofar as it is a step in the
ratemaking process. If a further objection is made, we see nothing
in it.
See San Diego Land & Town Co. v. National City,
supra.
The appellant further insists that the city council is not an
impartial tribunal, because, in effect, it is a judge in its own
case. It is too late, however, after the many decisions of this
Court which have either decided or recognized that the governing
body of a city may be authorized to exercise the ratemaking
function, to ask for a reconsideration of that proposition. In this
connection, the appellant calls attention to the fact that, by the
charter of the city, twenty-five percent of the electors may recall
a member of the Council and require him again to stand for
election. Nevertheless, he takes part in the ratemaking function
under his personal responsibility as an officer, and it cannot be
presumed, as matter of law, that the
Page 211 U. S. 280
keener sense of dependence upon the will of the people which
this feature of his tenure of office brings to him will distort his
judgment and sense of justice. It would be conceivable, of course,
that the members of the legislature themselves might be subjected
to the same process of recall, but it hardly would be contended
that that fact would lessen the legislative power vested in them by
the constitution and laws of the state. The charter of the city
also contains a provision that, upon petition of fifteen percent of
the voters of the city, any ordinance proposed must be submitted to
the people and may be by them adopted. It is said, therefore, that
the power of rate regulation might be, in this manner, exercised
directly by the electorate at large. It may well be doubted whether
such a result was contemplated by the legislature. There are
certainly grave objections to the exercise of such a power,
requiring a careful and minute investigation of facts and figures,
by the general body of the people, however intelligent and
right-minded. But the ordinance was not adopted in this manner in
this case, and it will be time enough for the courts of the states
and of the United States to consider, when that is done, whether
the objections only go to the expediency of such a method of
regulation, or reach deeper and affect its constitutionality.
Passing the questions of power, the appellant contends that it
was denied the equal protection of the laws because,
contemporaneously with the fixing of rates for it, different rates
were fixed for another telephone company doing business within the
city. The only information we have on the subject is in the
allegations of the bill, that a competitor of the complainant
engaged in like business was allowed to charge for telephone
service sums greatly in excess of those prescribed by the
ordinance, and that these rates discriminated against the
complainant and deprived it of the equal protection of the laws. An
important question is thus suggested, but we think the allegations
are so vague that we cannot pass upon it. Whether the two companies
operated in the same territory,
Page 211 U. S. 281
or afforded equal facilities for communication, or rendered the
same services, does not appear. For aught that appears, the other
company may have brought its patrons into communication with a very
much larger number of persons, dwelling in a much more widely
extended territory, and rendered very much more valuable services.
In other words, a just ground for classification may have existed.
Every presumption should be indulged in favor of the
constitutionality of the legislation. In
Sweet v. Rechel,
159 U. S. 380,
159 U. S. 392,
it was said:
"But, in determining whether the legislature, in a particular
enactment, has passed the limits of its constitutional authority,
every reasonable presumption must be indulged in favor of the
validity of such enactment. It must be regarded as valid unless it
can be clearly shown to be in conflict with the Constitution. It is
a well settled rule of constitutional exposition that, if a statute
may or may not be, according to circumstances, within the limits of
legislative authority, the existence of the circumstances necessary
to support it must be presumed."
It is to be taken into account in considering this, as well as
other questions, that the appellant has declined to furnish to the
council facts within its knowledge which would enable the council
to exercise their powers intelligently and justly, and that there
is no suggestion in the case at bar that the rates actually fixed
were so low as to operate as a practical confiscation of
property.
For the foregoing reasons, we are of the opinion that the action
of the court below in sustaining the demurrer was correct, and the
decree is
Affirmed.
[
Footnote 1]
Known, and referred to in the brief, as the Broughton Act.
[
Footnote 2]
"Section 2 (Article I)."
"
* * * *"
"(12.) To manage, control, sell, lease, or otherwise dispose of
any or all the property of the said corporation, and to appropriate
the income or proceeds thereof to the use of the said corporation;
provided that it shall have no power to mortgage or hypothecate its
property for any purpose."
"
* * * *"
"(17.) To provide and maintain a proper and efficient fire
department, and make and adopt such measures, rules, and
regulations for the prevention and extinguishment of fires, and for
the preservation of property endangered thereby, as may be deemed
expedient."
"
* * * *"
"(22.) To make and enforce within its limits such local police,
sanitary, and other regulations as are not in conflict with general
laws and are deemed expedient to maintain the public peace, protect
property, promote the public morals, and to preserve the heath of
its inhabitants."
"(23.) To exercise all municipal powers necessary to the
complete and efficient management and control of the municipal
property, and for the efficient administration of the municipal
government, whether such powers be expressly enumerated herein or
not, except such powers as are forbidden or are controlled by
general law."
"(24.) The powers conferred by this article shall be exercised
by ordinance, except as hereinafter provided."
"
* * * *"
"(Section 12, article 3.) All legislative power of the city is
vested in the Council, subject to the power of veto and approval by
the mayor, as hereinafter given, and shall be exercised by
ordinance; other action of the Council may be by order upon
motion."
"(Sec. 16.) Six members of the Council shall constitute a quorum
for the transaction of business, but no ordinance shall be passed
or other act done granting a franchise, making any contract,
auditing any bill, ordering any work to be done, or supplies to be
furnished, disposing of or leasing the city property, ordering any
assessment for street improvement, or building sewers, or any other
act to be done involving the payment of money, or the incurring of
debt by the city, unless two-thirds of the members of the whole
Council vote in favor thereof. All other ordinances may be passed
by a vote of a majority of the whole Council."
"(Sec. 33.) It shall, by ordinance, provide for maintaining a
fire alarm and police telegraph system, and for the cleaning and
sprinkling of graded and accepted streets."