City of Seymour v. Texas Electric Service Co.

• Decision Date: 28 August 1933
• Docket Number: No. 6537.,6537.
• Parties: CITY OF SEYMOUR et al. v. TEXAS ELECTRIC SERVICE CO.
• Court: U.S. Court of Appeals — Fifth Circuit

66 F.2d 814 (1933)

CITY OF SEYMOUR et al. v. TEXAS ELECTRIC SERVICE CO.

No. 6537.

Circuit Court of Appeals, Fifth Circuit.

August 1, 1933.

Rehearing Denied August 28, 1933.

J. W. Gormley, of Dallas, Tex., and J. A. Wheat, of Seymour, Tex. (Poppenhusen, Johnston, Thompson & Cole, of Chicago, Ill., and Touchstone, Wight, Gormley & Price, of Dallas, Tex., of counsel), for appellants.

R. K. Hanger, Mark McMahon and Warren Scarborough, all of Fort Worth, Tex., Charles L. Black, of Austin, Tex., and Joe A. Worsham, of Dallas, Tex., for appellee.

Before BRYAN, SIBLEY, and HUTCHESON, Circuit Judges.

HUTCHESON, Circuit Judge.

This appeal brings up for review on a record which, though voluminous, presents no conflict of fact, a decree enjoining the enforcement of minimum rate ordinances passed by the city council to put an end to a destructive rate war which, begun by the municipal plant, was joined in with determined vigor by appellee. These are the facts. Prior to what appellee regards as the intrusion into its local Eden of Fairbanks, Morse & Co., a seller of machinery and appliances, appellee operating from a central distributing system furnishing light and power to more than 65 communities in the state of Texas, was the sole distributor of electrical energy to the citizens and the city of Seymour. Urged thereto by Fairbanks, Morse & Co., and over the prolonged and bitter opposition of appellee Fairbanks, Morse v. Texas Electric Service Co. (C. C. A.) 32 F.(2d) 696; Fairbanks, Morse v. Texas Electric Service (C. C. A.) 63 F.(2d) 702 the city of Seymour in 1928, acting through its mayor and city council, entered into a contract with Fairbanks, Morse & Co., as allowed by statute, for the construction on credit alone, of a municipal light and power plant, to cost in excess of $125,000, and to be paid for not out of the general revenues, but entirely out of the revenues from the plant. The contract executed, the city officials at once began to solicit appellee's customers to make contracts with the municipal plant. Appealing to their prejudices, their civic pride, and their self-interest, they sought to dissatisfy them with appellee's service, promised lower taxes and a 10 per cent. reduction in light and power rates, and generally foretold that the establishment of their plant would immediately usher in a municipal millennium. So successful were these efforts, that about 350, more than half of appellee's customers, contracted to, and when the municipal plant was finished did, switch to that plant.

There are in the town of Seymour not over 650 potential customers, enough to insure a fair return for one of the plants, but not enough to insure such return for two. Faced with the present loss of half of its customers, and the prospect of losing the rest, appellee resolutely advanced upon the municipal plant to join battle with it on its own terms. Meeting reduction with reduction, it put into effect rates 10 per cent. lower than those its rival had inaugurated.

Appellee frankly admitted that the rates it thus instituted were not rates on which either it or the city could earn a fair return on the capital invested, but competitive rates; that is, rates put in not only to hold the business it had, but to draw back to it the municipal customers. The purely competitive character of these rates was emphasized by the fact that the rates in other communities served by appellee remained the same as those which appellee had had in force in Seymour before the rate war was begun there. This resolute and determined offensive making it clear that appellee was prepared for and willing to enter upon a finish fight, brought sharply home to the city and to Fairbanks, Morse a realization of what the result would be if the fight were further joined on these terms. They commenced to see that the city, the nominal owner of the plant, might not only come off second best in such a contest, but, unable to obtain sufficient revenues from the plant to pay the charges on it, might have to turn it back to its constructor, Fairbanks, Morse. Struck with dismay by this prospect, the city council, taking second thought, decided to abandon the contracts with its citizens which it had obtained before the rate war began, and to invoke instead the regulatory powers conferred upon it by law. It accordingly enacted ordinances fixing minimum rates below which neither the municipal nor the private plant could cut, providing in the ordinances, "The above rates are meant to be minimum rates fixed, any utility being authorized to fix a maximum in accordance with their desires." The rates thus fixed were substantially those it had contracted with its citizens to put in, 10 per cent. below the rates appellee had been charging before the municipal plant was erected, and 10 per cent. above the retaliatory rates appellee had put in, to meet the municipal cut.

Upon the passage of these ordinances, appellee, insisting that the city council was without power to pass minimum rate ordinances, and that the Fourteenth Amendment to the Constitution guaranteed to it, under the circumstances of this case, the right to carry on a competitive war to the knife, the knife to the hilt, sought first in the state court, and later in the federal court, to restrain their enforcement.

The grounds urged against the ordinances below were substantially the same as those urged here. These are: That the only power to regulate conferred on the city council by the state is the power to protect consumers from immediate and direct overcharges; that the power is exhausted in the establishment of a "fair return" rate, and that since the rates established are confessedly not "fair return" rates, the ordinances are void. That the power to regulate does not extend to protecting customers from the results of rate wars which, destroying competition, establish monopoly. That even if it be considered that the state has granted city councils, in proper cases, that is, cases where there is enough business for both, power to regulate competition between utilities by fixing minimum rates, this is not such a case; for here, the city having installed a municipal plant in competition with appellee in a community where there are not enough users to sustain both, it is unreasonable and unjust to prevent appellee from using, in the competitive struggle for existence which the city has forced upon it, the effective weapon of rate cutting. It is argued that the fact that the statutes of Texas authorizing cities to purchase light plants on the sole credit of the plant, to be paid for from the returns of the business, provide that rates must be fixed adequate to insure payment in accordance with the construction contract, makes it clear that it was intended by the Legislature that rates for municipal plants were to be fixed upon different considerations from those governing the fixing of rates for utilities privately owned. That in this state of the law an ordinance fixing the minimum rate at a figure which the city found necessary to obtain the return required to pay the plant out, while effective as to the city, could not be effective as a rate ordinance as to privately owned utilities, and further that the fact that the city has an inchoate interest in the plant and will own it if and when it is paid out, disqualified the members of its council to fix, by ordinance, the conditions under which competition between the municipal plant and appellee should go on. Finally, it is said that if the view that these ordinances are invalid under the laws of the state of Texas is a mistaken one, they are invalid under the Constitution and laws of the United States.

The District Judge took appellee's view of it. He thought with Judge Bourquin, in Great Northern Utilities Co. v. Public Service Comm., 52 F.(2d) 802, since reversed 289 U. S. 130, 53 S. Ct. 546, 77 L. Ed. 1080, that having cried "Lay on" the city could not by ordinance cry "Hold — enough," but must fight on to the bitter end.

We do not think he was right. It must be admitted, however, that on its face there is much of poetic justice in the view the District Judge took. There is strong meat in the doctrine "Who draws the sword shall perish by the sword," and if the only untoward result of the controversy were to be that Fairbanks, saddled with the plant, would find itself hoist on its own petard, there might be no tears to shed. If, in short, this were only a private war between Fairbanks, Morse and the Texas Electric Company, the court might well stay the city from thrusting on Fairbanks' side. Such a view of the situation is, however, too much foreshortened. The larger, the truer view, though the prime combatants seem at times to have lost sight of it, is that there is a cause at stake, the cause of public service, the importance of which far transcends the failure or success in the lists of either champion. This cause it is the business and function of rate regulation to serve. Such regulation is intended to, it should, supplant wasteful competition.¹

Though cities have no inherent power of rate regulation, and they must find it in statutes conferring the power, when it has been granted to them as it has been in Texas, they may exercise it fully. McQuillen, Municipal Corporations (2d Ed.) §§ 1874, 1875, 1877; Pond, Public Utilities (4th Ed.) § 536; State v. Sheboygan, 111 Wis. 23, 86 N. W. 657.

Viewing the matter in this light, we think it cannot be gainsaid that it was not only the right, but the duty of the council to put a stop to the contest before its ruthlessness had ruined one or both of the plants. We think, too, that in doing so, on the basis of fixing the same minimum for each plant, it acted justly and well within its powers. Public Service Comm. v. Gt. Northern Utilities, 289 U. S. 130, 53 S. Ct. 546, 77 L. Ed. 1080; Community Co. v. Natural Gas Co. (Tex. Civ. App.) 34 S.W.(2d) 900; Farmersville v. Texas-Louisiana Power Co. (Tex. Civ....