RAILROAD COMMISSION OF CALIFORNIA et al. v. LOS ANGELES RAILWAY CORPORATION, 280 U.S. 145

Mr. Justice Butler delivered the opinion of the Court. Appellee operates a street railway system and motor buses-for the transportation of passengers in the city of Los Angeles and in other parts of the county of Los Angeles. Its cars are operated on tracks laid in the streets under authority of 102 franchises granted from time to time since 1886. A few were obtained from the county; the others were granted by the city.

Seventy-three granted between November 28, 1890, and October 21, 1918, covering 113.41 miles, provide that “ the rate of fare . . . shall not exceed five cents.” Eighteen granted between March 2, 1920, and January 21, 1928, covering 12.33 miles, provide that “ the rate of fare . . . shall not be more than five cents . . . except upon a showing before a competent authority having jurisdiction over rates of fare that such greater charge is justified.” The remaining eleven, covering 10.5 miles, were granted at various times from 1886 to 1923;, none of them provides that the fare shall not exceed five cents; but it may be assumed that under the provisions of the other ordinances a fare of five cents was made applicable over all lines.

Prior to the decree in this case the basic fare charged was five cents. Maintaining that its existing rates were not sufficient to yield a reasonable return, the company, November 16, 1926, applied to the commission for authority to increase the basic fare to seven cents in cash or six and one-fourth cents in tokens to be furnished by the company, four for twenty-five cents. The commission, March 26, 1928, made a report and by an order denied the application. A petition for rehearing was denied.

June 22, 1928, the company brought this suit to have the rates- and order adjudged confiscatory and for temporary and permanent injunctions restraining the commission from enforcing them. The city intervened as party defendant. The case came on for hearing before three judges on an application for temporary injunction. U. S. C., Tit. 28, § 380. Affidavits were submitted, a transcript of all the evidence before the commission was received and the parties stipulated that thereon the cast should be finally determined on the merits.

The court found that the rates will not pérmit the company to earn a reasonable return and are confiscatory; and by its decree permanently enjoined the commission from enforcing them.

The sole controversy is whether the company is bound by contract with the city to continue to serve for the fares specified in the franchises — it being conceded that the finding below respecting the inadequacy of the five cent fare is sustained by the evidence; Appellants contend that at all times the city had power to establish rates by agreement and that the franchise provisions com stitute binding contracts that are still in force.

Op the other hapd the company maintains that the State never so empowered the city ; and it insists that, if the power was given and any such contracts were made, they have been abrogated. 1. It is possible for a State to authorize a municipal corporation by agreement to establish public service rates and thereby to suspend for a term of years not grossly excessive the exertion of governmental power by legislative action to fix just compensation to be paid for service furnished by public utilities. Detroit v. Detroit Citizens’ R. Co., 184 U. S. 368, 382. Vicksburg v. Vicksburg Water Works Co., 206 U.

S. 496, 508, 515. Public Service Co. v. St. Cloud, 265 U. S. 352, 355. And where a city, empowered by the State so to do, makes a contract with a public utility fixing the amounts to be paid for its service, the latter may not be required to serve for less even if the specified rates are unreasonably high. Detroit v. Detroit Citizens’ R. Co., supra, 389. And, in such case, the courts may not relieve the utility from its obligation to serve at the agreed rates however inadequate they may prove to be. Public Service Co. v. St. Cloud, supra.

This court is bound by the decisions of the highest courts of the States as to the powers of their municipalities. Georgia Ry. Co. v. Decatur, 262 U. S. 432, 438. Our attention has not been called to any California decision, ,and we think there is none, which decides that the state legislature has empowered Los Angeles to establish rates by contract. This Court is therefore required to construe the state laws on which appellants rely.

As it is in the public interest that all doubts be resolved in favor of the right of the State from time to time to prescribe rates, a grant' of authority to surrender the power is not to be inferred in the absence of a plain expression of purpose to that end. The delegation of authority to give up or suspend the power of rate regulation will not be found more readily than would an intention on the part of the State to authorize the bargaining away of its power to tax. Providence Bank v. Billings, 4 Pet. 514, 561. Railroad Commission Cases, 116 U. S. 307, 325. Freeport Water Co. v. Freeport, 180 U. S. 587, 599.

Stanislaus County v. San Joaquin C. & I. Co., 192 U. S. 201, 210. Puget Sound Traction Co. v. Reynolds, 244 U. S. 574, 579. This court applied the established rule in Home Telephone Co. v. Los Angeles, 211 U. S. 265. That company’s franchise was granted under the Broughton Franchise Act, which provided that every such franchise “ shall be granted upon the conditions in this act provided and not otherwise.” The city charter gave power to its council to fix charges for telephone service. The franchise stated that the rates should not exceed specified Amounts. An ordinance prescribing lower rates was passed.

The company brought suit for injunction against its enforcement on the ground that the ordinance violated the contract clause of the Constitution of the United States.,'. The city insisted that it had not been empowered by the State to make such a contract, and this court upheld its contention. It said (p. 273): “ 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. . . .

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.” And, dealing with the charter provision there relied on by the company, the court said (p. 274): “ 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 . . . but entirely unfitted to describe the authority to contract.- • It authorizes command, but not agreement.”

Section 470 of the Civil Code (March 21, 1872) cited by áppéllants merely regulates procedure.

Section 497 authórizes“poli’tical subdivisions to grant authority for the laying of. railroads in. streets “ under such restrictions and limitations ” as they may provide. - Stats. 1891, p. 12. This is too general.' The clause -in § 501’ (Stats. 1903, p. 172) providing that the rate of fare in municipalities of the first class “must not exceed five cents” does not relate to the power to contract, and plainly has no application here because Los Angeles never belonged to that class.

Section 1 of the Broughton Franchise Act provides that franchises “ shall be granted upon the conditions in this Act provided and not otherwise.” The Act requires the sale of such franchises upon advertisement stating the character of the franchise or privilege proposed to be granted, but it nowhere expressly empowers the city to establish rates by contract. This court in the Home Telephone Company case dealt with the quoted provision. It said (p. 275): “ Here is an emphatic caution against reading into the act any conditions which are not clearly expressed in the act itself. ...

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.” And, so far as concerns the matter under consideration, the Act was not expanded by the amendment of June 8,1915. It authorizes grantors of such franchises to impose such additional terms and conditions “ whether governmental or contractual in character ” .as in their judgment are in the public interest.

This general language does not measure up to the rule earlier invoked here by Los Angeles and applied by this court in the Home Telephone Company case. The appellants invoke provisions of the city charter which are printed in the margin. But it requires no discussion to show that they are not sufficient to empower the city by contract to establish rates. In support of their claim, they cite Columbus R. & P. Co. v. Columbus, 249 U. S. 399; Opelika v, Opelika Sewer Co., 265 U. S. 215; Public Service Co. v. St. Cloud, supra, and Southern Utilities Co. v. Palatka, 268 U. S. 232.

But the Columbus case did not involve, and this Court did not there decide, the question of power. See p. 407 and 194 U. S. at pp. 532, 534. And in the other cases, we followed the decisions of the courts of the respective States. Appellants have failed to sustain their contention that the city was empowered to make such rate contracts. ■ 2. But assuming that the fares were established by the franchise contracts we are of opinion that'such contracts have been abrogated. The State had power upon the company’s application, through its commission or otherwise, to terminate them. Pawhuska v.

Pawhuska Oil & Gas Co., 250 U. S. 394. Trenton v. New Jersey, 262 IT. S. 182, 186. Henderson Water Co. v. • Corporation Commission, 269 U. S. 278. Denney v. Pacific Tel. Co., 276 U. S. 97.. November 30, 1918, the company applied to have the commission investigate its service and financial condition and for an order authorizing it to “ so operate its system and change its rates that the income will be sufficient to pay the costs of the service.” May 31, 1921, the commission found that the existing fares would not permit the .company to collect enough to enable it to provide adequate service. See P.

U/ R. 1922A, 66, 90. And it made an order permitting a small increase. The company did not accept it, but applied for a rehearing. After several postponements the case was stricken from the calendar, and some years later the company asked that its application be dismissed. The commission, October 18, 1926, granted the company’s request and also revoked the order. Shortly thereafter the company applied for a basic fare of seven cents in cash or six and one-quarter cents in tokens. The fares so proposed were substantially higher than those which were not accepted by the company.

Again the commission made' extensive investigations. And March 26, 1928, it filed a report which contained findings as to the value of -the property, operating revenues, operating expenses including cost of depreciation and taxes, amount available for return, average net income for five years ending with 1926, stated that the cost of operation might be reduced, -and concluded that by reason of such facts the rates of fare charged by the company were not unreasonable and that the rates proposed would be unjust and unreasonable. And the commission made an order denying the company’s application.

There is no decision in the courts of the State as to the effect of the proceedings before and action taken by the commission, and therefore we are required to construe the applicable provisions of the local constitution and statutes. Denney v. Pacific Tel. Co., supra, 101. Under the state constitution, Art. XII, § 23, as amended November 3, 1914, and the Public Utilities Act of April 23, 1915, the commission has exclusive power to regulate rates. And § 27 of the Act gave to street railway companies the right to charge more than five cents upon showing before the commission that the higher charge is justified.

No distinction is made between rates established by franchise contracts and those otherwise fixed. Fares may not be changed without approval of the commission. The policy of the State is that all rates shall be just and reasonable (§ 15) and the commission is directed, whenever after hearing had upon its own motion or upon complaint it shall find that rates are unjust or insufficient, to determine the just and reasonable rates thereafter to be observed- § 32(a). The language used in Denney v. Pacific Tel.

Co., supra, p. 102, is pertinent here. “ The Department made its investigation and order without regard to the franchise rates and treated the questions presented as unaffected thereby. It exercised the power and duty to fix reasonable and compensatory rates irrespective of any previous municipal action. We must treat the result as a bona fide effort to comply with the local statute.” The proceedings before the commission and its orders clearly show that it twice took jurisdiction to determine just and reasonable rates.

Its order of May 31, 1921, by reason of the company’s failure to put in the increased rates never became operative and finally was vacated. The report and order of March 26, 1928, found that existing rates were just and reasonable and in legal effect required the company to continue to observe them. The court below found the rates confiscatory, and appellants do not here question that finding. Decree affirmed. Mr. Justice McReynolds is of opinion that, as our finding that the' city had no power to make rate contracts is sufficient to dispose of the case, it would be better not to take up the second point.

Its first sentence, as originally enacted, read: “Every franchise or privilege to . . . construct or operate railroads along or Upon any public street or highway, or to exercise any other privilege whatever hereafter proposed to be granted by the . . . governing-or legislative body of any . . . city ... shall be granted upon the conditions in this Act provided-, and not otherwise.” Stats. 1893, p. 288. The Act was amended in 1897 (Stats. 1897, pp. 135, 177); re-enacted in 1901 (Stats. 1901, p. 265) and 1905 (Stats. 1905, p, 777) and amended in’ 19.09. Stats. 1909, p. 125.

The first sentence has remained substantially the same. The amendment of" June 8, 1915 (Stats. 1915, p. 1300) inserted immediately after this-sentence: “The grantor may* however, in such franchise impose such other and additional terms"and conditions not in conflict herewith, whether governmental or contractual in character, as in the judgment of the legislative body thereof are' to the .public interest.” Art.

I, § 2(25) (February 16, 1905) Stats. 1905, p. 994, providing that no franchise for use of public streets should be granted by the city except by a specified vote nor for a term of more than 21 years and that “Every grant . . . shall make adequate provision by way of forfeiture ... or otherwise to secure efficiency of public service at reasonable rates and the maintenance of the property in good order throughout the term of the grant.” Art.

I, §2(30) (March 25, 1911) Stats. 1911, p. 2063: “The city . . . shall have the right and power: ... to fix and determine the rates ... for . . . the conveyance of passengers ... by means of street railway cars. ... To regulate, subject to the provisions of the constitution of the State of California, the construction and operation of . . . street railways. . . .” Art.

I, § 2(40), being § 2(25), supra, (as amended April 7, 1913) Stats. 1913, p. 1633: “The city . . . shall have the right and power: To grant franchises, ... for furnishing transportation ... or any other public service; to prescribe the terms and conditions of any such grant, and to prescribe by ordinance ... the method of procedure for making such grants; . . .”

Section 27 declares that fares of more than five cents shall not be charged on street railroads “ except upon a showing before the commission that such greater-charge is justified; provided, that until the decision of the commission upon such showing, a street . . . railroad . . . may continue to ... receive the fare lawfully in effect on November 3, 1914. Stats. 1915, p.

Section 32 (a): “ Whenever the commission, after a hearing had upon its own motion or upon complaint, shall find that the rates . . . collected by any public utility ... are unjust, unreasonable, discriminatory or preferential, or in anywise in violation of any provision of law' or that such rates ... are insufficient, the commission shall determine the just, reasonable or sufficient rates . . . to be thereafter observed and in force, and shall fix the same by order as hereinafter provided.” Stats, 1915, p. 132,