City of Houston v. Southwestern Bell Telephone Co Southwestern Bell Telephone Co v. City of Houston

• Decision Date: 29 May 1922
• Docket Number: Nos. 219 and 220,s. 219 and 220
• Citation: 42 S.Ct. 486,66 L.Ed. 961,259 U.S. 318
• Parties: CITY OF HOUSTON v. SOUTHWESTERN BELL TELEPHONE CO. SOUTHWESTERN BELL TELEPHONE CO. v. CITY OF HOUSTON et al
• Court: U.S. Supreme Court

259 U.S. 318

42 S.Ct. 486

66 L.Ed. 961

CITY OF HOUSTON

v SOUTHWESTERN BELL TELEPHONE CO.

SOUTHWESTERN BELL TELEPHONE CO.

v. CITY OF HOUSTON et al.

Nos. 219 and 220.

Argued April 24, 25, 1922.

Decided May 29, 1922.

Messrs. W. J. Howard, Sewall Myer, and A. E. Amerman, all of Houston, Tex., for city of Houston.

Messrs. C. M. Bracelen, of New York City, Nelson Phillips, Joseph D. Frank, David A. Frank, and W. H. Duls, all of Dallas, Tex., and N. T. Guernsey, of New York City, for Southwestern Bell Telephone Co.

Mr. Justice CLARKE delivered the opinion of the court.

These are cross-appeals in a suit to restrain the enforcement of an ordinance enacted by the city of Houston, Tex. (hereinafter referred to as the City), prescribing rates for telephone service, based upon the claim that the rates are confiscatory.

The master, to whom the case was referred, found that the rates were clearly confiscatory, and the District Court, while modifying his findings in some respects, confirmed his report and in its decree enjoined the enforcement of the ordinance. A federal constitutional question being involved, a direct appeal brings the case to this court for review.

The Constitution of Texas, adopted in 1876 (section 17, art. 1), provides:

'No irrevocable or uncontrollable grant of special privileges or immunities shall be made; but all privileges and franchises granted by the Legislature, or created under its authority, shall be subject to the control thereof.'

It has been definitely decided that, while municipal corporations in Texas, as agencies of the state, may have the power to prescribe rates for public service corporations, this provision of the Constitution prohibits their making contracts for the future which may not be modified at any time by appropriate action of the municipality. San Antonio Traction Co. v. Altgelt, 200 U. S. 304, 26 Sup. Ct. 261, 50 L. Ed. 491; City of San Antonio v. San Antonio Public Service Co., 255 U. S. 547, 41 Sup. Ct. 428, 65 L. Ed. 777; Southern Iowa Electric Co. v. City of Chariton, Iowa, 255 U. S. 539, 41 Sup. Ct. 400, 65 L. Ed. 764.

The ordinance here involved was passed in 1909, and therefore this state of the law would remove all question of contract from the case, if it were not that in 1915 the appellee in No. 219 the Southwestern Bell Telephone Company (hereinafter referred to as the Company), by purchase and merger acquired all of the property of a local corporation, the 'Houston Home Telephone Company,' and duly accepted an ordinance by which the City approved the merger. This ordinance contained the provision that the Company——

'agrees that it will not increase rates as at present charged by it for service in the city of Houston, unless it appears upon a satisfactory showing * * * that there exists a necessity for an increase of charges, in order that the said company may earn a fair return upon its capital actually invested in the Houston plant.'

It is now contended by the City that the acceptance of this ordinance estops the Company from asserting that the value of its plant, as of the date of the inquiry, and not the cost of it—the 'capital actually invested'—shall be the basis for rate-making, but the Company contends that the quoted provision of the state Constitution rendered the City incapable of contracting by such an ordinance and that therefore it is void and not binding on either party.

The master, treating the merger ordinance as void, determined the value of the property, used and useful in the operations of the Company, on the basis of its value at the time of the taking of the testimony in 1919, to be $6,000,000; that the Company's total revenues for 1919, computed on the ordinance rates, amounted to $908,258; and that its total expenses were $1,214,462, thus showing a net loss to the Company for the year of $306,204, without making any allowance for interest upon the investment.

Upon exceptions to the report of the master, the District Court decided that the Company was bound by the merger ordinance of 1915 to accept the cost of its plant, as distinguished from its value at the time of the inquiry, as the basis for rate-making, and thereupon reduced the valuation of the Company's property to $4,571,567. The court also reduced the allowance of 'reserve for annual depreciation,' as found by the master from $348,150 to $289,380. After making these and some other deductions the court, nevertheless, found that the operating expenses of the Company, not making any allowance for return on the investment, exceeded the income during 1919 by the sum of $247,434. We fully agree with the District Court that there is a clear preponderance of the evidence in favor of the conclusion that the ordinance rate was confiscatory, and the decree of the court will, therefore, be affirmed.

The decree enjoining the City from enforcing the rate ordinance provides that the City shall have the right to apply for a modification of it whenever it shall be made to appear that, by reason of change of circumstances or conditions, the rates prescribed by the ordinance (of 1909) are sufficient to yield a fair return upon the capital of the Company actually invested, and also that the decree is without prejudice to the rights of the City to exercise its rate-making power within constitutional limits. This form of decree and the change in business conditions since it was entered render it so probable that there will be further controversy as to what are reasonable rates for telephone service in the City, in which it will be important to determine what the legal basis is for determining the value of the Company's property, that we think it proper to consider...