New Haven Water Co. v. City of New Haven

We held in Ansonia v. AnsoniaWater Co., 101 Conn. 151, 125 A. 474, in conformity with the decisions of the Supreme Court of the United States, that rates fixed by contract between a public service corporation and its customers, whether private persons or a municipality, may be superseded by rates fixed by the State in an appropriate exercise of the police power, except in two classes of cases: "First, those in which the State has in its Constitution or by statute explicitly conferred upon the municipality the power to establish by ordinance the rates to be charged by public service corporations operating within its limits," and second, "the so-called ``franchise contract' cases." We are concerned with the first of these exceptions. The same rule must hold whether the power conferred by statute upon the municipality to establish rates be by contract or by ordinance. The exceptions, we say, are confined to cases "in which it clearly and unmistakably appears, first, that the State has delegated its rate-regulating power to the municipality, acting within its geographical limits, and, second, that the municipality has with equal clarity and certainty exercised its delegated power by a contract fixing the rate to be charged for a limited term."

The General Assembly, in the Act we quote in the statement, specifically made the terms of this contract obligatory upon the city and company. It was more than the delegation of power to fix the rates and make the contract; it was not only the legislative approval of the rates and the terms of the contract as made, but also the making of the same obligatory upon city and company. It was as though the contract had been made directly with the General Assembly. The Act was a clear delegation by the General Assembly of its rate-regulating power to the municipality. The chief consideration to the company was the agreement of the city that it should have the exclusive right to sell water to the inhabitants of the city at the schedule of rates specified. The consideration to the city was that its inhabitants were to get an adequate supply of water at the stated rates and that the rates to be charged to all consumers of water in the city should at all times be fair and reasonable, and that it was to receive the water required for public purposes free, and have the right to purchase the company's property, assets and franchise at the end of twenty-five years from February 20th, 1902; and every successive period of twenty-five years thereafter.

The obligation of the company under the contract is unlimited in duration; that of the city is also unlimited unless it shall consider the rates charged for water to be unreasonable, whereupon, if the city and company cannot agree upon the rates, the matter shall be submitted to arbitration, and when it is confirmed by the court, it shall be conclusive for a period of at least five years from the date of the arbitration report. In effect, the Act of the General Assembly amended the charter of the city, and not only ratified the contract it had entered into with the water company, but made it obligatory upon it. This was as though authority to make this contract had been conferred in the charter of the city, and it had made the contract pursuant to such authority, and subsequently the General Assembly had not only ratified the contract but expressly made it obligatory upon its agent, the city. In effect, too, it amended the charter of the water company. The General Assembly had before it the contract, as to the water company a perpetual contract, which by its terms the company could not change. It was this contract, unlimited in its duration, which the General Assembly authorized and made obligatory upon the parties to it.

The city contends that since the State has the power to enter into contracts unlimited in duration it may delegate this power to the city. The water company contends that the State cannot by contract forever disable the legislative branch of the government from regulating the rates fixed by contract between a public service corporation and a municipality, since this would entail the permanent surrender of its exercise of the police power. The water company emphatically asserts that this court has determined the precise question involved in the case of Ansonia v. Ansonia WaterCo., 101 Conn. 151, 125 A. 474. We have already indicated the extent to which this opinion went. It did not determine the question before us.

The ultimate question which we must decide is controlled by the Federal decisions. We quote from one decision of the United States Supreme Court; it is decisive of the settled rule of that court. St. Cloud PublicService Co. v. St. Cloud, 265 U.S. 352, 44 Sup. Ct. 492. The city of St. Cloud, by ordinance, granted to the public service company the right to construct and maintain for thirty years works for the manufacture, distribution and sale of gas at a specified rate. The company intended to increase this rate; upon the city's threat to interfere with the collection of the proposed increased rate, the company made application for an injunction and for an adjudication that the rate of the ordinance was confiscatory. The court held the ordinance and the acceptance of the franchise under it was a contract. Its opinion, by Mr. Justice Sanford, declared: "It has been long settled that a State may authorize a municipal corporation to establish by an inviolable contract the rates to be charged by a public service corporation for a definite term, not grossly unreasonable in time, and that the effect of such a contract is to suspend, during its life, the governmental power of fixing and regulating rates. . . . And where a public service corporation and the municipality have power to contract as to rates, and exert that power by fixing the rates to govern during a particular time, the enforcement of such rates is controlled by the obligation resulting from the contract, and the question whether they are confiscatory is immaterial. SouthernIowa Electric Co. v. Chariton, 255 U.S. 539, 542 [41 Sup. Ct. 400]; . . . Paducah v. Paducah Ry. Co.,261 U.S. 267, 273 [43 Sup. Ct. 335]; Georgia Ry. Co. v.Decatur, 262 U.S. 432, 438 [43 Sup. Ct. 613]; HomeTel. Tel. Co. v. Los Angeles, 211 U.S. 265, 273 [29 Sup. Ct. 50]." The right of a city to contract away its right as to the rates to be charged by a public service corporation, is a limitation imposed upon the police power. Except as so limited, its power cannot be contracted away. The State may not authorize a municipality to establish, by contract, rates to be charged by a public service corporation for a definite term which is unreasonable in time; it cannot authorize a contract as to rates for an unlimited or perpetual term, which necessarily would be grossly unreasonable in time, since this would be a surrender by the State of its exercise of the police power of fixing and regulating rates. In Atlantic Coast Line R. Co. v.Goldsboro, 232 U.S. 548, 558, 34 Sup. Ct. 364, the court said: "It is settled that neither the ``contract' clause nor the ``due process' clause has the effect of overriding the power of the State to establish all regulations that are reasonably necessary to secure the health, safety, good order, comfort, or general welfare of the community; that this power can neither be abdicated nor bargained away, and is inalienable even by express grant; and that all contract and property rights are held subject to its fair exercise." We declared in Ansonia v. Ansonia Water Co., supra: "The root of the matter is that the rate-regulating power of the State is a limitation on the right to fix rates by private contract; and that therefore the rightful exercise of that governmental power cannot be said to impair the obligation of such contracts." P. 163. "All the cases," we say at page 159, "in which a contract between a municipality and a public service corporation establishing the rates to be charged by such corporation, has been held by the Supreme Court of the United States to suspend, during the life of the contract, the governmental power of fixing and regulating rates, divide themselves into two classes," namely, those to which we have referred in an earlier part of the opinion. Hudson County Water Co. v. McCarter,209 U.S. 349, 28 Sup. Ct. 529; Walla Walla City v.Walla Walla Water Co., 172 U.S. 1, 19 Sup. Ct. 77;Paducah v. Paducah Ry. Co., 261 U.S. 267,43 Sup. Ct. 335; Los Angeles v. Los Angeles City Water Co.,177 U.S. 558, 20 Sup. Ct. 736; Puget Sound T., L. P. Co. v. Reynolds, 223 F. 371, 375; Barre v. Perry Scribner, 82 Vt. 301, 73 A. 574.

The contract between the city and water company would not be void in toto, though the rate provision was subject to modification by public authority. It and every similar contract as to rates carries with it the implied provision that it must not contravene the police power in respect to the duration of the contract and that if it does it must yield to modification by lawful authority. So far as the parties to the contract are concerned, the rates contracted for must stand unless changed by their agreement or by public authority. The contract as to the city, while for an indefinite period, does not contract away the police power, since it provides that the rates must be fair and reasonable, and gives a remedy to the city by way of arbitration if the rates charged are unreasonable, and particularly specifies the items which shall be taken into consideration by the arbitrators in fixing rates which are fair and reasonable. It also provides that the award shall be conclusive for at least five years. It results that the city may have the rates reassessed at intervals of five years. This is a limitation upon the indefinite term of the contract as to rates. An unlimited provision coupled with a power of arbitration for definite periods does not surrender the police power for an unlimited, or for a grossly unreasonable, period. The rates may be changed at every arbitration period. The contract as to the water company is for an indefinite period. A provision for the indefinite duration of the contract as to the water company is a surrender of the police power and beyond the power of the General Assembly to itself grant, or to delegate the power to grant, to a municipality. There is no provision for arbitration similar to that given the city. Had the provision for arbitration been equally applicable to the water company, no claim could have been made by it that the contract as to it was for an indefinite period, since the rates would have been subject to reappraisement every five years. Under the Federal decisions we have quoted from and Ansonia v. Ansonia Water Co.,supra, rates which are fixed by a contract authorized by the legislature for a definite term, which is not unreasonable in its duration, are controlled by the terms of the contract, "and the question whether they are confiscatory is immaterial." Rates which are fixed by a contract authorized by the legislature for an indefinite term, or an unreasonable term, are in violation of the police power, since their duration extends beyond a reasonable period. If the contract be for an indefinite term, or an unreasonable period of duration of the rates, upon proper application, the Public Utilities Commission may, under Chapter 328 of the Public Acts of 1921, determine whether the duration of the rates is unreasonable — one for an indefinite term would necessarily be unreasonable — and so finding, fix the duration and their amounts. Since the duration of the rates in the contract before us as to the water company is for an indefinite term, the water company may at any time make application to the Public Utilities Commission for a finding that this term is unreasonable, and fixing a reasonable term and the rates as to it for such term. Courts will not interfere with the legislative authorization as to rates except in clear cases. But where the exercise of the police power in fixing rates for an unlimited time is manifestly unreasonable courts will interfere. State v. Bassett, 100 Conn. 430,433, 123 A. 842; State v. Porter, 94 Conn. 639, 642,110 A. 59. "The legislative department is the judge, within reasonable limits, to determine what public convenience and public welfare require, and the wisdom of its legislation is not the concern of the courts."State v. Bassett, supra, 432. Whether the commission, or the court on appeal, makes the determination of the rates under the provision of the contract which requires that they be fair and reasonable, or under the terms of Chapter 328 of the Public Acts of 1921, which in effect provides that the rates must be just, reasonable and adequate for the public convenience, necessity and welfare, becomes immaterial, since both provisions mean the same thing. "Just" is the equivalent of "fair," and rates which are adequate to enable the water company to provide properly for the public convenience, necessity and welfare, are reasonable rates.

The tenth article of the contract provides that in case any franchise or other tax, except upon its tangible property, shall be assessed against the company, the city shall save the company harmless from a defined part thereof, or, on failure so to do, it shall pay a specified sum for water for fire protection, and for all other water used by the city the then lowest meter rates to private consumers less 25% discount therefrom.

The United States has assessed against the company an income tax under Act of Congress,. August 5th, 1909, and a capital stock tax under Act of Congress of September 8th, 1916, which the company has paid, and the city has neither saved the company harmless from the payment of these taxes nor paid it for the water supplied for fire protection and other municipal purposes. The company made no demand upon the city for these taxes until on or about August 20th, 1926. The liability of the city to pay these taxes depends upon whether the income and capital stock taxes are included in the words "any franchise or other tax, except upon its tangible property." They are susceptible of this construction. They are also susceptible of a construction which would exclude them from these terms. They may refer to taxes imposed by the State or municipality or both, or to all kinds of Federal taxes. The language is thus ambiguous. It is to be construed as including those kinds of taxes which the parties to the contract intended them to include.Leonard v. Dyer, 26 Conn. 172; Bean v. Atwater,4 Conn. 3, 10. Several canons of construction are applicable. Since the public interest is affected, the language should be construed so as to protect that interest. Since this phrase of the contract was inserted for the benefit of the water company, its language must be construed most strongly against the company.

Applying the rule, ejusdem generis to this phrase, the Federal income and capital stock taxes cannot be brought within it. These taxes were not in existence when this contract was made and there is nothing in the record to indicate that the parties anticipated the subsequent enactment of legislation creating these new modes of taxation. Moreover, the history of these taxes makes it clear that the parties to the contract never could have intended to include these taxes within this phrase. A Federal income tax had been declared unconstitutional. A constitutional amendment, proposed and enacted subsequent to the making of this contract, made the enactment of the income tax in 1909 possible. The capital stock tax of 1916 was enacted as a substitute for the corporation tax of 1909. Both taxes were, in 1902, foreign to the thought and business of the country; neither was within the contemplation of these parties.

The authorities reach a like conclusion in related instances. Des Moines Union Ry. Co. v. Chicago GreatWestern Ry. Co., 188 Iowa 1019, 177 N.W. 90, and cases cited; Catawissa R. Co. v. Philadelphia ReadingRy. Co., 255 Pa. 269, 99 A. 807; Sharon Ry. Co. v. Erie R. Co., 268 Pa. 396, 112 A. 242; ParkBuilding Co. v. Yost Fur Co., 208 Mich. 349,175 N.W. 431; Haight v. Pittsburgh, Ft. W. C. R. Co., 73 U.S. (6 Wall.) 15.

The water company has paid the Federal income tax for seventeen years and the capital stock tax for nearly ten years, and never until August 20th, 1926, made demand upon the city that it was entitled to be saved harmless from the payment of these taxes, yet the city had not only paid the company the proportion of taxes upon gross earnings of the plaintiff as provided in Article Tenth of the contract, but also the franchise tax enacted in 1915 as an amendment to General Statutes, § 1370. Presumably the water company knew during this long period what taxes it had intended to include under this phrase. Its failure to either claim or demand these taxes is the most conclusive evidence of its understanding that they were not included within the phrase defining the liability of the city for taxes. The practical construction of the parties, for so long a period, of this part of the contract, which involved the yearly or oftener payment of two additional taxes, is most persuasive evidence of the true construction to be given this phrase. Volk v.Volk Mfg. Co., Inc., 101 Conn. 594, 601, 126 A. 847;Safford v. Morris Metal Products Co., 97 Conn. 650,653, 118 A. 37; Construction Information Co. v.Cass, 74 Conn. 213, 217, 50 A. 563. The city is not liable for the income and capital stock taxes heretofore paid by the water company, nor will it be obligated to save the company harmless from future assessments of these taxes, but the same must be paid by the company so long as they continue to be assessed and this contract shall continue. The water company must furnish the city with water for public and municipal purposes, including water for school and fire protection purposes, without cost or charge as provided under the provisions of Article First of the contract.

We answer the questions upon which our advice is asked as follows: (1) The rates of the contract are not unalterable, but are continually subject to the exercise of the police power of the State when their duration is an unreasonable one. (2) The rates fixed in and by the contract may be increased or lowered by the Public Utilities Commission upon their finding that the duration of the contract is an unreasonable one and that the rates charged are not fair and reasonable to the New Haven Water Company, and thereupon they may fix a reasonable period for the duration of these rates and fix reasonable rates. (3) The city of New Haven is not obliged to save the water company harmless from such part of the Federal corporation income taxes and capital stock taxes as is measured "by the ratio of the gross revenue received from consumers within the city of New Haven, to the gross revenue of said company from all its consumers," which it has heretofore paid, or may hereafter be obliged to pay. (4) The water company must furnish the city with water for public and municipal purposes, including water for school and fire protection purposes, without cost or charge as provided under the provisions of the contract.

In this opinion the other judges concurred.