San Diego Land Town Company v. -National City/Opinion of the Court

by by John Marshall Harlan

United States Supreme Court

174 U.S. 739

San Diego Land Town Company  v.  -National City

While admitting that the power to limit charges for water sold by a corporation like itself has been too often upheld to be now questioned, the appellant contends that the constitution and statutes of California relating to rates or compensation to be collected for the use of water supplied to a municipality or its inhabitants are inconsistent with the constitution of the United States. It is said that the state constitution and laws authorized rates to be established without previous notice to the corporation or person immediately interested in the m tter, and without hearing in any form, and therefore were repugnant to the clause of the federal constitution declaring that no state shall deprive any person of property without due process of law.

Upon the point just stated we are referred to the decision of this court in Chicago, M. & St. P. Ry. Co. v. Minnesota, 134 U.S. 418, 452, 456, 457, 10 Sup. Ct. 462, 466, 467. That case involved the constitutionality of a statute of Minnesota empowering a commission to fix the rates of charges by railroad companies for the transportation of property. The supreme court of the state held that it was intended by the statute to make the action of the commission final and conclusive as to rates, and that the railroad companies were not at liberty, in any form or at any time, to question them as being illegal or unreasonable. This court said: 'This being the construction of the statute, by which we are bound in considering the present case, we are of opinion that, so construed, it conflicts with the constitution of the United States in the particulars complained of by the railroad company. It deprives the company of its right to a judicial investigation, by due process of law, under the forms and with the machinery provided by the wisdom of successive ages for the investigation, judicially, of the truth of a matter in controversy, and substitutes therefor, as an absolute finality, the action of a railroad commission, which, in view of the powers conceded to it by the state court, cannot be regarded as clothed with judicial functions or possessing the machinery of a court of justice. * * * By the second section of the statute in question it is provided that all charges made by a common carrier for the transportation of passengers or property shall be equal and reasonable. Under this provision the carrier has a right to make equal and reasonable charges for such transportation. In the present case the return alleged that the rate of charge fixed by the commission was not equal or reasonable, and the supreme court held that the statute deprived the company of the right to show that judicially. The question of the reasonableness of a rate of charge for transportation by a railroad company, involving, as it does, the element of reasonableness, both as regards the company and as regards the public, is eminently a question for judicial investigation, requiring due process of law for its determination. If the company is deprived of the power of charging reasonable rates for the use of its property, and such deprivation takes place in the absence of an investigation by judicial machinery, it is deprived of the lawful use of its property, and thus, in substance and effect, of the property itself, without due process of law, and in violation of the constitution of the United States; and in so far as it is thus deprived, while other persons are permitted to receive reasonable profits upon their invested capital, the company is deprived of the equal protection of the laws.' Observe that this court based its interpretation of the statute of Minnesota upon the construction given to it by the supreme court of that state.

What this court said about the Minnesota statute can have no application to the present case, unless it be made to appear that the constitution and laws of California invest the municipal authorities of that state with power to fix water rates arbitrarily, without investigation, and without permitting the corporations or persons affected thereby to make any showing as to rates to be exacted, or to be heard at any time or in any way upon the subject. The contention of appellant is that such is the purpose and necessary effect of the constitution of the state. We are not at liberty so to interpret that instrument. What the supreme court of California said in Spring Val. Water-Works v. City of San Francisco, 82 Cal. 286, 306, 307, 309, 315, 22 Pac. 910, 914, 915, upon this subject, would seem to be a sufficient answer to the views expressed by the appellant. In that case it was co tended that a board of supervisors had fixed rates arbitrarily, without investigating, without any exercise of judgment or discretion, without any reference to what they should be, and without reference either to the expense incurred in furnishing water, or to what was fair compensation therefor. The court said: 'The constitution does not contemplate any such mode of fixing rates. It is not a matter of guesswork or an arbitrary fixing of rates without reference to the rights of the water company or the public. When the constitution provides for the fixing of rates or compensation, it means reasonable rates and just compensation. To fix such rates and compensation is the duty and within the jurisdiction of the board. To fix rates not reasonable, or compensation not just, is a plain violation of its duty. But the courts cannot, after the board has fully and fairly investigated and acted, by fixing what it believes to be reasonable rates, step in and say its action shall be set aside and nullified, because the courts, upon a similar investigation, have come to a different conclusion as to the reasonableness of the rates fixed. There must be actual fraud in fixing the rates, or they must be so palpably and grossly unreasonable and unjust as to amount to the same thing. * * * The fact that the right to store and dispose of water is a public use, subject to the control of the state, and that its regulation is provided for by the state constitution, does not affect the question. 'Regulation,' as provided for in the constitution, does not mean 'confiscation' or 'taking without just compensation.' If it does, then our constitution is clearly in violation of the constitution of the United States, which provides that this shall not be done. The ground taken by the appellant is that the fixing of rates is a legislative act; that by the terms of the constitution the board of supervisors are made a part of the legislative department of the state government, and exclusive power given them which cannot be encroached upon by the court. * * * This court has held that the fixing of water rates is a legislative act, at least to the extent that the action of the proper bodies clothed with such power cannot be controlled by writs, which can issue only for the purpose of controlling judicial action. Water-Works v. Bryant, 52 Cal. 132; Spring Val. Water-Works v. City and County of San Francisco, Id. 111; Water-Works v. Bartlett, 63 Cal. 245. There are other cases holding the act to be legislative; but whether it is judicial, legislative, or administrative is immaterial. Let it be which it may, it is not above the control of the courts in proper cases. * * * We are not inclined to the doctrine, asserted by the appellant in this case, that every subordinate body of officers to whom the legislature delegates what may be regarded as legislative power thereby becomes a part of the legislative branch of the state government and beyond judicial control. In the case of Davis v. Mayor, etc., supra [1 Duer, 451-497], it is further said: '* * * The doctrine, exactly as stated, may be true when applied to the legislature of the state, which, as a coordinate branch of the government, representing and exercising in its sphere the sovereignty of the people, is, for political reasons of manifest force, wholly exempt in all its proceedings from any legal process or judicial control; but the doctrine is not, nor is any portion of it, true, when applied to a subordinate municipal body, which, although clothed to some extent with legislative and even political powers, is yet, in the exercise of all its powers, just as subject to the authority and control of courts of justice, to legal process, legal restraint, and legal correction, as any other body or person, natural or artificial." Again: 'On the part of the respondent it is contended, in support of the decision of the court below, that notice to the plaintiff of an intention to fix the rates was necessary, and that without such notice being given the action of the board was a taking of its property without due process of law. But the constitution is self-executing, and, as it does not require notice, we think no notice was necessary. It does not follow however that, because no notice is necessary, the board are for that reason excused from applying to corporations or individuals interested to obtain all information necessary to enable it to act intelligibly and fairly in fixing the rates. This is its plain duty, and a failure to make the proper effort to procure all necessary information from wnatever source may defeat its action.'

In the more recent case of San Diego Water Co. v. City of San Diego, 118 Cal. 556, 566, 50 Pac. 633, the state court, referring to section 1 of the constitution of California, said that the meaning of that section was that 'the governing body of the municipality, upon a fair investigation, and with the exercise of judgment and discretion, shall fix reasonable rates, and allow just compensation. If they attempt to act arbitrarily, without investigation, or without the exercise of judgment and discretion, or if they fix rates so palpably unreasonable and unjust as to amount to arbitrary action, they violate their duty, and go beyond the powers conferred upon them. Such was the conclusion reached by this court in Spring Val. Water-Works v. City of San Francisco, 82 Cal. 286, 22 Pac. 910, 1046, to which conclusion we adhere. Although that case was decided without the light cast on the subject by later decisions of the supreme court of the United States, and contains some observations that perhaps require modification, we are satisfied with the correctness of the conclusion [construction] there given to this section of the constitution.'

Was the appellant entitled to formal notice as to the precise day upon which the water rates would be fixed by ordinance? We think not. The constitution itself was notice of the fact the ordinances or resolutions fixing rates would be passed annually in the month of February in each year, and would take effect on the 1st day of July thereafter. It was made by statute the duty of the appellee at least 30 days prior to the 15th day of January in each year to obtain from the appellant a detailed statement, showing the names of water-rate payors, the amount paid by each during the preceding year, and 'all revenue derived from all sources,' and the 'expenditures made for supplying water during said time.' It was the right and duty of appellant in January of each year to make a detailed statement, under oath, showing every fact necessary to a proper conclusion as to the rates that should be allowed by ordinance. Act March 7, 1881, § 2, above cited. Provision was thus made for a hearing in an appropriate way. The defendant's board could not have refused to receive the statement referred to in the statute, or to have duly considered it, and given it proper weight in determining rates. If the state by its constitution or laws had forbidden the city or its board to receive and consider any statement or showing made by the appellant touching the subject of rates, a different question would have arisen. But no such case is now presented. In Kentucky Railroad Tax Cases, 115 U.S. 321, 333, 6 Sup. Ct. 57, it was said: 'This return made by the corporation through its officers is the statement of its own case, in all the particulars that enter into the question of the value of its taxable property, and may be verified and fortified by such explanations and proofs as it may see fit to insert. It is laid by the auditor of public accounts before the board of railroad commissioners, and constitutes the matter on which they are to act. They are required to meet for that purpose on the 1st day of September of each year at the office of the auditor at the seat of government. * * * These meetings are public, and not secret. The time and place for holding them are fixed by law.'

There is no ground to say that the appellant did not in fact have, or was denied, an opportu ity to be heard upon the question of rates. On the contrary, it appears in evidence that the subject of rates was considered in conferences between the local authorities and the officers of the appellant. Those officers may not have been present at the final meeting of the city board when the ordinance complained of was passed. They were not entitled, of right, to be present at that particular meeting. They were heard, and there is nothing to justify the conclusion that the case of the appellant was not fully considered before the ordinance was passed.

That it was competent for the state of California to declare that the use of all water appropriated for sale, rental, or distribution should be a public use, and subject to public regulation and control, and that it could confer upon the proper municipal corporation power to fix the rates of compensation to be collected for the use of water supplied to any city, county, or town, or to the inhabitants thereof, is not disputed, and is not, as we think, to be doubted. It is equally clear that this power could not be exercised arbitrarily, and without reference to what was just and reasonable as between the public and those who appropriated water and supplied it for general use; for the state cannot by any of its agencies, legislative, executive, or judicial, withhold from the owners of private property just compensation for its use. That would be a deprivation of property without due process of law. Chicago, B. & Q. R. Co. v. City of Chicago, 166 U.S. 226, 17 Sup. Ct. 581; Smyth v. Ames, 169 U.S. 466, 524, 18 Sup. Ct. 418. But it should also be remembered that the judiciary ought not to interfere with the collection of rates established under legislative sanction, unless they are so plainly and palpably unreasonable as to make their enforcement equivalent to the taking of property for public use without such compensation, as, under all the circumstances, is just, both to the owner and to the public; that is, judicial interference should never occur, unless the case presents, clearly and beyond all doubt, such a flagrant attack upon the rights of property, under the guise of regulations, as to compel the court to say that the rates prescribed will necessarily have the effect to deny just compensation for private property taken for the public use. Chicago & G. T. Ry. Co. v. Wellman, 143 U.S. 339, 344, 12 Sup. Ct. 400; Reagan v. Trust Co., 154 U.S. 362, 399, 14 Sup. Ct. 1047; Smyth v. Ames, above cited. See, also, Henderson Bridge Co. v. Henderson City, 173 U.S. 592, 614, 615, 19 Sup. Ct. 553.

In view of these principles, can it be said that the rates in question are so unreasonable as to call for judicial interference in behalf of the appellant? Such a question is always an embarrassing one to a judicial tribunal, because it is primarily for the determination of the legislature or of some public agency designated by it. But when it is alleged that a state enactment invades or destroys rights secured by the constitution of the United States, a judicial question arises, and the courts, federal and state, must meet the issue, taking care always not to entrench upon the authority belonging to a different department, nor to disregard a statute, unless it be unmistakably repugnant to the fundamental law.

What elements are involved in the general inquiry as to the reasonableness of rates established by law for the use of property by the public? This question received much consideration in Smyth v. Ames, above cited. That case, it is true, related to rates established by a statute of Nebraska for railroad companies doing business in that state. But the principles involved in such a case are applicable to the present case. It was there contended that a railroad company was entitled to exact such charges for transportation as would enable it at all times, not only to pay operating expenses, but to meet the interest regularly accruing upon all its outstanding obligations, and justify a dividend upon all i § stock; and that to prohibit it from maintaining rates or charges for transportation adequate to all those ends would be a deprivation of property without due process of law, and a denial of the equal protection of the laws. After observing that this broad proposition involved a misconception of the relations between the public and a railroad corporation, that such a corporation was created for public purposes, and performed a function of the state, and that its right to exercise the power of eminent domain, and to charge tolls, was given primarily for the benefit of the public, this court said: 'It cannot, therefore, be admitted that a railroad corporation maintaining a highway under the authority of the state may fix its rates with a view solely to its own interest, and ignore the rights of the public. But the rights of the public would be ignored if rates for the transportation of persons or property on a railroad are exacted without reference to the fair value of the property used for the public, or the fair value of the services rendered, but in order simply that the corporation may meet operating expenses, pay the interest on its obligations, and declare a dividend to stockholders. If a railroad corporation has bonded its property for an amount that exceeds its fair value, or if its capitalization is largely fictitious, it may not impose upon the public the burden of such increased rates as may be required for the purpose of realizing profits upon such excessive valuation or fictitious capitalization; and the apparent value of the property and franchises used by the corporation, as represented by its stocks, bonds, and obligations, is not alone to be considered when determining the rates that may be reasonably charged.' 169 U.S. 544, 18 Sup. Ct. 433. In the same case it was also said that 'the basis of all calculation as to the reasonableness of rates to be charged by a corporation maintaining a highway under legislative sanction must be the fair value of the property used by it for the convenience of the public. And, in order to ascertain that value, the original cost of construction, the amount expended in permanent improvements, the amount and market value of its bonds and stock, the present as compared with the original cost of construction, the probable earning capacity of the property under particular rates prescribed by statute, and the sum required to meet operating expenses, are all matters for consideration, and are to be given such weight as may be just and right in each case. We do not say that there may not be other matters to be regarded in estimating the value of the property. What the company is entitled to ask is a fair return upon the value of that which it employs for the public convenience. On the other hand, what the public is entitled to demand is that no more be exacted from it for the use of a public highway than the services rendered by it are reasonably worth.' 169 U.S. 546, 18 Sup. Ct. 434.

This court had previously held in Road Co. v. Sandford, 164 U.S. 578, 596, 598, 17 Sup. Ct. 198, which case involved the reasonableness of rates established by legislative enactment for a turnpike company, that a corporation performing public services was not entitled, as of right, and without reference to the interests of the public, to realize a given per cent. upon its capital stock; that stockholders were not the only persons whose rights or interests were to be considered; and that the rights of the public were not be ignored. The court in that case further said: 'Each case must depend upon its special facts; and when a court, without assuming itself to prescribe rates, is required to determine whether the rates prescribed by the legislature for a corporation controlling a public highway are, as an entirety, so unjust as to destroy the value of its property for all the purposes for which it was acquired, its duty is to take into consideration the interests both of the public and of the owner of the property, together with all other circumstances that are fairly to be considered in determining whetehr the legislature has, under the guise of regulating rates, exceeded its constitutional authority, and practically deprived the owner of property without due process of law. * * * The utmost that any corporation operating a public highway can rightfully demand at the hands of the legislature, when exerting its general powers, is that it receives what, under all the circumstances, is such compensation for the use of its property as will be just, both to it and to the public.'

These principles are recognized in recent decisions of the supreme court of California. San Diego Water Co. v. City of San Diego (1897) 118 Cal. 556, 50 Pac. 633; Redlands L. & C. Domestic Water Co. v. City of Redlands (1898) 53 Pac. 843, 844.

The contention of the appellant in the present case is that in ascertaining what are just rates the court should take into consideration the cost of its plant; the cost per annum of operating the plant, including interest paid on money borrowed, and reasonably necessary to be used in constructing the same; the annual depreciation of the plant from natural causes resulting from its use; and a fair profit to the company over and above such charges for its services in supplying the water to consumers, either by way of interest on the money it has expended for the public use, or upon some other fair and equitable basis. Undoubtedly all these matters ought to be taken into consideration, and such weight be given them, when rates are being fixed, as, under all the circumstances, will be just to the company and to the public. The basis of calculation suggested by the appellant is, however, defective in not requiring the real value of the property and the fair value in themselves of the services rendered to be taken into consideration. What the company is entitled to demand, in order that it may have just compensation, is a fair return upon the reasonable value of the property at the time it is being used for the public. The property may have cost more than it ought to have cost, and its outstanding bonds for money borrowed and which went into the plant may be in excess of the real value of the property. So that it cannot be said that the amount of such bonds should in every case control the question of rates, although it may be an element in the inquiry as to what is, all the circumstances considered, just, both to the company and to the public.

One of the points in dispute involves the question whether the losses to the appellant arising from the distribution of water to consumers outside of the city are to be considered in fixing the rates for consumers within the city. In our judgment, the circuit court properly held that the defendant city was not required to adjust rates for water furnished to it and to its inhabitants, so as to compensate the plaintiff for any such losses. This is so clear that we deem it unnecessary to do more than to state the conclusion reached by us on this point.

One of the questions pressed upon our consideration is whether the ordinance of the city should have expressly allowed the appellant to charge for what is called a 'water right.' That right, as defined by appellant's counsel, is one 'to the continued and perpetual use of the water upon the land to which it has been once supplied, upon payment of rates therefor established by the company.' In the opinion of the circuit court, it is said that 'no authority can anywhere be found for any charge for the so-called 'water right." This view is controverted by appellant, and cases are cited which, it is contended, show that the broad declaration of the circuit court cannot be sustained. Irrigation Co. v. Rowell, 80 Cal. 114, 22 Pac. 53; Same v. Dunbar, 80 Cal. 530, 22 Pac. 275; Flume Co. v. Chase, 87 Cal. 561, 25 Pac. 756, and 26 Pac. 825; Clyne v. Water Co., 100 Cal. 310, 34 Pac. 714; Flume Co. v. Souther, 32 C. C. A. 548, 90 Fed. 164.

We are of opinion that it is not necessary to the determination of the present case tha this question should be decided. We are dealing here with an ordinance fixing rates or compensation to be collected within a given year for the use of water supplied to a city and its inhabitants, or to any corporation, company, or person doing business or using water within the limits of that city. In our judgment, the defendant correctly says in its answer that the laws of the state have not conferred upon it or its board of trustees the power to prescribe by ordinance or otherwise that the purchase and payment for so-called 'water rights' should be a condition to the exercise of the right of consumers to use any water appropriated for irrigation or affected with a public use.

The only issue properly to be determined by a final decree in this cause is whether the ordinance in question fixing rates for water supplied for use within the city is to be stricken down as confiscatory by its necessary operation, and therefore in violation of the constitution of the United States. If the ordinance, considered in itself, and as applicable to water used within the city, is not open to any such objection, that disposes of the case, so far as any rights of the appellant may be affected by the action of the defendant. The appellant asks, among other things, that it be decreed to be entitled to charge and collect for water rights at reasonable rates as a condition upon which it will furnish water for the purposes of irrigation, notwithstanding the rates fixed by the defendant's board of trustees for water sold and furnished within the city. That is a question wholly apart from the inquiry as to the validity under the constitution of the United States of the ordinance of the defendant fixing annual rates in performance of the duty enjoined upon it by the constitution and laws of the state. Counsel for appellant, while insisting that the circuit court erred in saying that there was no such thing as a water right, says: 'The constitution of the state has nothing whatever to do with a water right, or the price that shall be paid for it. It simply provides for fixing the annual rental to be paid for the water furnished and used. When one obtains his water right by purchase or otherwise, he has a right to demand that the water shall be furnished to his lands at the price fixed, as provided by law, and that the company shall exact no more. But he must first acquire the right to have the water on such terms. Whether, in fixing the annual rates to be charged, the body authorized to fix them can take into account the amount that has been received by the company for water rights is another question, and one that is not presented in this case. Nor is any question raised as to what would be a reasonable amount to exact for a water right, or whether the courts can interfere to determine what is a reasonable amount to charge therefor.'

These reasons are sufficient to sustain the conclusion already announced, namely, that the present case does not require or admit of a decree declaring that the appellant may, in addition to the rates established by the ordinance, charge for what is called a 'water right,' as defined by it. It will be time enough to decide such a point when a case actually arises between the appellant and some person or corporation involving the question whether the former may require, as a condition of its furnishing water within the limits of the city on the terms prescribed by the defendant's ordinance, that it be also paid for what is called a 'water right.'

We will not extend this opinion by an analysis of all the evidence. It is sufficient to say that, upon a careful scrutiny of the testimony, our conclusion is that no case is made that will authorize a decree declaring that the rates fixed by the defendant's ordinance, looking at them in their entirety,-and we cannot properly look at them in any other light,-are such as amount to a taking of property without just compensation, and therefore to a deprivation of property without due process of law. There is evidence both ways. But we do not think that we are warranted in holding that the rules upon which the defendant's board proceeded were in disregard of the principles heretofore announced by this court in the cases cited. The case it not one for judicial interference with the action of the local authorities, to whom the question of rates was committed by the state.

The decree dismissing the bill is affirmed.

Notes