Spring Valley Water-Works v. Schottler/Opinion of the Court

Article 4, § 31, of the constitution of California, adopted in 1849, is as follows: 'Corporations may be formed under general laws, but shall not be created by special act, except for municipal purposes. All general laws and special acts passed pursuant to this section may be altered from time to time, or repealed.'

Acts were passed by the legislature under this authority on the fourteenth of April, 1853, and the thirtieth of April, 1855, providing for the formation of corporations for certain purposes, and on the twenty-second of April, 1858, these acts were extended so as to include the formation of corporations for the purpose of supplying cities, counties, and towns with water. Under this extension water companies were empowered to acquire lands and waters for their works by purchase and condemnation, and, subject to the reasonable direction of the public authorities, to use streets, ways, alleys, and public roads for laying their pipes, but it was expressly provided, by an amendment enacted in 1861, 'that all canals, reservoirs, ditches, pipes, aqueducts, and all conduits * *  * shall be used exclusively for the purpose of supplying any city or county, or any cities or towns, in this state, or the inhabitants thereof, with pure, fresh water.'

Section 4 is as follows: 'Sec. 4. All corporations formed under the provisions of this act, or claiming any of the privileges of the same, shall furnish pure, fresh water to the inhabitants of such city and county, or city or town, for family uses, so long as the supply permits, at reasonable rates, and without distinction of persons, upon proper demand therefor, and shall furnish water, to the extent of their means, to such city and county, or city or town, in case of fire or other great necessity, free of charge. And the rates to be charged for water shall be determined by a board of commissioners, to be selected as follows: Two by such city and county, or city or town, authorities, and two by the water company; and in case that four cannot agree to the valuation, then, in that case, the four shall choose a fifth person, and he shall become a member of said board; if the four commissioners cannot agree upon a fifth, then the sheriff of the county shall appoint such fifth person. The decision of a majority of said board shall determine the rates to be charged for water for one year, and until new rates shall be established. The board of supervisors, or the proper city or town authorities, may prescribe such other proper rules relating to the delivery of water, not inconsistent with this act and the laws and constitution of this state.'

The Spring Valley Water-works Company was formed under this act on the nineteenth of June, 1858, and since that time has expended a very large amount of money in the erection of extensive and substantial works for the supply of the city and county of San Francisco with water. In January, 1878, the board of supervisors of the city and county appointed Isaac B. Friedlander and H. B. Williams, and the company appointed W. F. Babcock and Charles Webb Howard, and these four afterwards appointed Jerome Lincoln, to constitute a board of commissioners to determine, under the provisions of section 4, the rates to be charged by the company for water. This board met and fixed a tariff of rates to go into effect on the first of June 1878. In July of the same year, Friedlander, one of the commissioners appointed by the supervisors, died. By his death a vacancy was created in the board which has never been filled.

In 1879 the people of California adopted a new constitution, which went into effect on the first of January, 1880. Article 14, §§ 1, 2, of this constitution, are as follows:

'ARTICLE 14.

'Water and Water Rights.

'Section 1. The uses of all water now appropriated, or that     may hereafter be appropriated, for sale, rental, or      distribution, is hereby declared to be a public use, and      subject to the regulation and control of the state in the      manner to be prescribed by law: provided, that the rates or      compensation to be collected by any person, company, or      corporation in this state for the use of water supplied to      any city and county, or city or town, or the inhabitants      thereof, shall be fixed annually by the board of supervisors,      or city and county, or city or town council, or other      governing body of such city and county, or city or town, by      ordinance or otherwise, in the manner that other ordinances      or legislative acts or resolutions are passed by such body,      and shall continue in force for one year and no longer. Such     ordinances or resolutions shall be passed in the month of      February of each year, and take effect on the first day of      July thereafter. Any board or body failing to pass the     necessary ordinances or resolutions fixing water rates where      necessary, within such time, shall be subject to peremptory      process to compel action at the suit of any party interested,      and shall be liable to such further processes and penalties      as the legislature may prescribe. Any person, company, or     corporation collecting water rates in any city and county, or      city or town, in this state, otherwise than as so established shall forfeit the      franchises and water works of such person, company, or      corporation to the city and county, or city or town where the      same are collected for the public use.

'Sec. 2. The right to collect rates or compensation for the     use of water supplied to any county, city and county or town,      or the inhabitants thereof, is a franchise, and cannot be      exercised except by authority of and in the manner prescribed      by law.'

Under this provision of the constitution, and the legislation based thereon, the board of supervisors claim the right and power to fix the rates to be charged by the company for water, and refuse to appoint a member to fill the vacancy in the board of commissioners occasioned by the death of the former incumbent. This suit was begun in the supreme court of the state for a writ of mandamus, requiring the board of supervisors to take action in the matter and fill the vacancy. The court, on final hearing, refused the writ and dismissed the petition. This writ of error was brought by the company to review that judgment.

The general question involved in this case is whether water companies in California, formed under the act of 1858, before the adoption of the constitution of 1879, have a right which the state is prohibited by the constitution of the United States from impairing or taking away, to charge their customers such prices for water as may from time to time be fixed by a commission made up of two persons selected by the company, two by the public authorities of the locality, and, if need be, a fifth selected by the other four, or by the sheriff of the county. The Spring Valley Company claims no rights of this character that may not also be claimed by every other company formed under the same act. That the companies must sell at reasonable prices all the water they are able to furnish consumers, and that the prices fixed for the time being by the honest judgment of such a commission as was specially provided for in the act, must be deemed reasonable, both by the company and the public, is not denied. The dispute is as to the power of the state, under the prohibitions of the constitution of the United States, to substitute for this commission another, selected without the co-operation of the company, or some other tribunal of a different character, like the municipal authorities of the locality. The Spring Valley Company claims that it has, under its charter, a right to the maintenance of the commission which was created by the requisite appointments in 1878, and the object of this suit is to compel the board of supervisors to perpetuate that commission by filling the vacancy that exists in its membership. So that the whole controversy here is as to the right of water companies that availed themselves of the privileges of the act of 1858 to secure a virtual monopoly of trade in water at a particular place, to demand the appointment of the commission provided for in that act, notwithstanding the constitution of 1879 and the legislation under it.

The Spring Valley Company is an artificial being, created by or under the authority of the legislature of California. The people of the state, when they first established their government, provided in express terms that corporations, other than for municipal purposes, should not be formed except under general laws, subject at all times to alteration or repeal. The reservation of power to alter or repeal the charters of corporations was not new, for almost immediately after the judgment of this court in the Dartmouth College Case, (Dartmouth College v. Woodward, 4 Wheat. 518,) the states, many of them, in granting charters, acted on the suggestion of Mr. Justice STORY in his concurring opinion (page 712) and inserted provisions by which such authority was expressly retained. Even before this decision it was intimated by the supreme judicial court of Massachusetts, in Wales v. Stetson, 2 Mass. 143, that such a reservation would save to the state its power of control. In California the constitution put this reservation into every charter, and consequently this company was from the moment of its creation subject to the legislative power of alteration, and, if deemed expedient, of absolute extinguishment as a corporate body.

Water for domestic uses was difficult to be got in some parts of the state. Large amounts of money were needed to secure a sufficient supply for the inhabitants in many localities, and as a means of combining capital for such purposes the act of 1858 was passed. Other statutes had been enacted before to effect the same object, but it is said they were not such as a company with capital enough to supply San Francisco was willing to accept. The act of 1858 was thought sufficiently favorable, and the Spring Valley Company, after organizing under it, expended a large amount of money to provide the means of supplying the territory on which San Francisco is built, and make it possible to support a great population there. All this was done in the face of the limitations of the constitution on the power of the legislature to create a private corporation and put it beyond the reach of legislative control, not only as to its continued existence, but as to its privileges and franchises. One of the obligations the company assumed was to sell water at reasonable prices, and the law provided for a special commission to determine what should be deemed reasonable both by the consumers and the company, but there is nowhere to be found any evidence of even a willingness to contract away the power of the legislature to prescribe another mode of settling the same question if it should be considered desirable. In the Sinking Fund Cases, 99 U.S. 721, it was said that whatever rules for the government of the affairs of a corporation might have been put into the charter when granted could afterwards be established by the legislature under its reserved power of amendment. Long before the constitution of 1879 was adopted in California, statutes had been passed in many of the states requiring water companies, gas companies, and other companies of like character, to supply their customers at prices to be fixed by the municipal authorities of the locality; and, as an independent proposition, we see no reason why such a regulation is not within the scope of legislative power, unless prohibited by constitutional limitations or valid contract obligations. Whether expedient or not is a question for the legislature, not the courts.

It is said, however, that appointing municipal officers to fix prices between the seller and the buyers is in effect appointing the buyers themselves, since the buyers elect the officers, and that this is a violation of the principle that no man shall be a judge in his own case. But the officers here selected are the governing board of the municipality, and they are to act in their official capacity as such a board when performing the duty which has been imposed upon them. Their general duty is, within the limit of their powers, to administer the local government, and in so doing to provide that all shall so conduct themselves, and so use their own property, as not unnecessarily to injure others. They are elected by the people for that purpose, and whatever is within the just scope of the purpose may properly be intrusted to them at the discretion of the legislature. That it is within the power of the government to regulate the prices at which water shall be sold, by one who enjoys a virtual monopoly of the sale, we do not doubt. That question is settled by what was decided on full consideration in Munn v. Illinois, 94 U.S. 113. As was said in that case, such regulations do not deprive a person of his property without due process of law. What may be done if the municipal authorities do not exercise an honest judgment, or if they fix upon a price which is manifestly unreasonable, need not now be considered, for that proposition is not presented by this record. The objection here is not to any improper prices fixed by the officers, but to their power to fix prices at all. By the constitution and the legislation under it, the municipal authorities have been created a special tribunal to determine what, as between the public and the company, shall be deemed a reasonable price during a certain limited period. Like every other tribunal established by the legislature for such a purpose, their duties are judicial in their nature, and they are bound in morals and in law to exercise an honest judgment as to all matters submitted for their official determination. It is not to be presumed that they will act otherwise than according to this rule. And here, again, it is to be kept in mind that the question before us is not as to the penalties to be inflicted on the company for a failure to sell at the prices fixed, but as to the power to fix the price; not whether the company shall forfeit its property and franchises to the city and county if it fails to meet the requirements of the constitution, but whether the prices it shall charge may be established in the way provided for in that instrument. It will be time enough to consider the consequences of the omissions of the company when a case involving such questions shall be presented.

But it is argued that as the laws in force before 1858, for the formation of water companies, which provided for fixing the rates by the municipal authorities, were not accepted by the Spring Valley Company, and that of 1858, without such a provision, was, it is to be inferred, that the state contracted with this company not to subject it to the judgment of such authorities in a matter so vital to its interests. If the question were one of construction only, this argument might have force, but the dispute now is as to legislative power, not legislative action. The constitution of California, adopted in 1849, prohibited one legislature from bargaining away the power of suceeding legislatures to control the administration of the affairs of a private corporation formed under the laws of the state. Of this legislative disability the Spring Valley Company had notice when it accepted the privileges of the act of 1858, and it must be presumed to have built its works and expended its moneys in the hope that neither a succeeding legislature, nor the people in their collective capacity when framing a constitution, would ever deem it expedient to return to the old mode of fixing rates, rather than on any want of power to do so, if found desirable. The question here is not between the buyer and the seller as to prices, but between the state and one of its corporations as to what corporate privileges have been granted. The power to amend corporate charters is, no doubt, one that bad men may abuse, but, when the amendments are within the scope of the power, the courts cannot interfere with the discretion of the legislatures that have been invested with authority to make them. The organization of the Spring Valley Company was not a business arrangement between the state and the company as contracting parties, but the creation of a new corporation to do business within the state and to be governed as natural persons or other corporations were or might be. Neither are the chartered rights acquired by the company under the law to be looked upon as contracts with the city and county of San Francisco. The corporation was created by the state. All its powers came from the state, and none from the city or county. As a corporation it can contract with the city and county in any way allowed by law, but its powers and obligations, except those which grow out of contracts lawfully made, depend alone on the statute under which it was organized, and such alterations and amendments thereof as may, from time to time, be made by proper authority. The provision for fixing rates cannot be separated from the remainder of the statute by calling it a contract. It was a condition attached to the franchise conferred on any corporation formed under the statute and indissolubly connected with the reserved power of alteration and repeal.

It follows that the court below was right in refusing to award the writ of mandamus which was prayed, and its judgment to that effect is affirmed.