Southern Iowa Electric Company v. City of Chariton/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 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 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, 14 Sup. Ct. 1047, 38 L. Ed. 1014; Smyth v. Ames, 169 U.S. 466, 18 Sup. Ct. 418, 42 L. Ed. 819; San Diego Land & Town Co. v. Jasper, 189 U.S. 439, 442, 23 Sup. Ct. 571, 47 L. Ed. 892; Knoxville v. Knoxville Water Co., 212 U.S. 1, 17, 29 Sup. Ct. 148, 53 L. Ed. 371; Willcox v. Consolidated Gas Co., 212 U.S. 19, 41, 29 Sup. Ct. 192, 53 L. Ed. 382, 48 L. R. A. (N. S.) 1134, 15 Ann. Cas. 1034; Minnesota Rate Cases, 230 U.S. 352, 434, 33 Sup. Ct. 729, 57 L. Ed. 1511, 48 L. R. A. (N. S.) 1151, Ann. Cas. 1916A, 18; Ceder Rapids Gas Co. v. Cedar Rapids, 223 U.S. 655, 32 Sup. Ct. 389, 56 L. Ed. 594; Des Moines Gas Co. v. Des Moines, 238 U.S. 153, 35 Sup. Ct. 811, 59 L. Ed. 1244; Denver v. Denver Union Water Co., 246 U.S. 178, 194, 38 Sup. Ct. 278, 62 L. Ed. 649; 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, 593, 21 Sup. Ct. 493, 45 L. Ed. 679; Detroit v. Detroit City Ry. Co., 184 U.S. 368, 22 Sup. Ct. 410, 46 L. Ed. 592; Knoxville Water Co. v. Knoxville, 189 U.S. 434, 437, 23 Sup. Ct. 531, 47 L. Ed. 887; Cleveland v. Cleveland City Ry. Co., 194 U.S. 519, 24 Sup. Ct. 756, 48 L. Ed. 1102; Home Telephone Co. v. Los Angeles, 211 U.S. 265, 273, 29 Sup. Ct. 50, 53 L. Ed. 176; Minneapolis v. Minneapolis Street Ry. Co., 215 U.S. 417, 30 Sup. Ct. 118, 54 L. Ed. 259; Columbus Ry. Power & Light Co. v. City of Columbus, 249 U.S. 399, 39 Sup. Ct. 349, 63 L. Ed. 669, 6 A. L. R. 1648.

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.

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 to municipal corporations under the law of Iowa such authority? Its possession must have been conferred, if at all, by section 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 section 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 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 section     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 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 section      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 section 6 of      the ordinance hereinbefore referred to, were not fixed by      contract.'

Indeed, the doctrine thus expounded was out a reiteration of the rule of the Iowa law laid down in previous cases. City of Tipton v. Tipton Light & Heating Co., 176 Iowa, 224, 157 N. W. 844; Iowa Railway & Light Co. v. Jones Auto Co., 182 Iowa, 982, 164 N. W. 780; Town of Williams v. Iowa Falls Electric Co., 185 Iowa, 493, 170 N. W. 815. 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 section 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 Iowa, 224, 157 N. W.     844; Selkirk v. Gas Co., 176 N. W. 301. And see San Antonio     Co. v. City (D. C.) 257 Fed. 467. To like effect is Iowa Co. v. Jones, 182 Iowa, 982, 164 N. W. 780. 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, 241, 19 Sup. Ct. 383, 43 L. Ed. 679; Worcester v. Worcester Street Ry. Co., 196 U.S. 539, 548, 25 Sup. Ct. 327, 49 L. Ed. 591; Braxton County Court v. West Virginia, 208 U.S. 192, 28 Sup. Ct. 275, 52 L. Ed. 450; Englewood v. Denver & South Platte Ry. Co., 248 U.S. 294, 296, 39 Sup. Ct. 100, 63 L. Ed. 253; Pawhuska v. Pawhuska Oil Co., 250 U.S. 394, 399, 39 Sup. Ct. 526, 63 L. Ed. 1054.

Decrees reversed, and causes remanded for further proceedings in conformity with this opinion.