State v. City of Iowa City

• Decision Date: 23 September 1992
• Docket Number: No. 91-641,91-641
• Citation: 490 N.W.2d 825
• Parties: , 78 Ed. Law Rep. 1022 STATE of Iowa, Iowa State Board of Regents, and the University of Iowa, Appellants, v. CITY OF IOWA CITY and Stephen J. Atkins, City Manager, Appellees.
• Court: Iowa Supreme Court

Page 825

490 N.W.2d 825

139 P.U.R.4th 162, 78 Ed. Law Rep. 1022

STATE of Iowa, Iowa State Board of Regents, and the University of Iowa, Appellants, v. CITY OF IOWA CITY and Stephen J. Atkins, City Manager, Appellees.

No. 91-641.

Supreme Court of Iowa.

Sept. 23, 1992.

Bonnie J. Campbell, Atty. Gen., and Gordon E. Allen, Deputy Atty. Gen., for appellants.

John W. Hayek of Hayek, Hayek, Holland & Brown, Iowa City, for appellees.

Considered by HARRIS, P.J., and CARTER, LAVORATO, NEUMAN, and SNELL, JJ.

LAVORATO, Justice.

In this municipal utility ratemaking case, we must decide whether a municipality's employment of a flat use rate for sewer treatment services is unreasonable, arbitrary, and unlawfully discriminatory. The city of Iowa City is the municipality whose rate is being challenged. The challengers are the State of Iowa, the Iowa State Board of Regents, and the University of Iowa. For convenience, we refer to the city of Iowa City as the city and to the three challengers collectively as the university. Because we agree with the district court that the university failed to sustain its challenge, we affirm.

For almost fifty years (1935-1983), the city and the university successfully negotiated a series of contracts for sewage treatment services and the financing of capital improvements in the sewage treatment system. In the beginning the city and the university entered into a contract for joint construction of a sewage collection and disposal system. Under the contract the university paid $118,200 as its share of the construction costs. This represented forty percent of the total cost of the system.

The parties modified this initial contract in 1950 to include sewage treatment services for University Heights and Coralville. The contract was modified again in 1957.

The city and the university entered into a new contract in 1964. Under this contract, the university's share of a proposed sewage improvement was established at $577,500. This new contract canceled all earlier ones and designated the university a "customer" of the system, which would pay a service fee based on a percentage of its water bill. The fee structure established was basically the same one used for all customers.

Two years later, the city and the university entered into a contract calling for certain improvements in the sanitary sewer system. The contract obligated the university to shoulder some of the costs for these improvements. As before, the university agreed to be treated as a customer and to pay the same sewer charges as other customers paid.

In 1977 the city and the university executed a contract entitled "Modification No. 1 to Contract for Joint Construction and Use of Sewer Facilities by City of Iowa City and State University of Iowa." This contract changed the university's sewer service fees from a percentage of established water rates to a flat rate for the quantity of water used. More specifically the contract provided:

The city will charge and the university will pay the same rate for collection and treatment of sewage as the rate charged to any other customer for standard domestic sewage.

In short, the city established a uniform commodity-based rate that was to be applied to all customers, including the university.

The 1977 contract further provided that (1) it should end July 31, 1983, (2) either party could indicate its desire to renegotiate the contract upon 180 days written notice before the expiration date, and (3) the terms of the 1977 contract would continue until the parties agreed to a revised contract. During the life of this contract, the city unilaterally increased rates from time to time without any objection from the university. Neither party sought to renegotiate the 1977 contract at any time before July 31, 1983, its stated termination date.

By the early 1980s federal and state regulations regarding sewage treatment became increasingly stringent. The city knew it had to upgrade its sewage treatment system to comply with these regulations. So it hired consultants, appointed committees, and formulated plans to improve its system. Two university representatives were members of a committee which came up with a plan the city adopted. The plan called for (1) rehabilitating the existing plant to improve its operation, (2) a new plant downstream from the existing plant, and (3) adding new trunk lines outside the central portion of Iowa City to feed into the new plant. The projected cost for these improvements was estimated at $40 million.

Armed with this information the university began making overtures to the city in late 1985 to negotiate a new contract. The city made it clear that "rates were not negotiable."

In June 1986 the university formally sought to negotiate a new contract by letter to the city. Several days later the university again wrote the city, suggesting arbitration to aid their negotiations. A month later, in a third letter to the city, the university told the city what it wanted and why The assessment of sewer charges on the basis of a flat rate for all customers, including the university, was equitable during the last period of nearly nine years. However, applying that approach in the future with the impending major improvement program requiring dramatic rate increases to cover the capital cost of expanding the system would result in gross inequities.

Several weeks following this last letter, the city responded by passing an ordinance that sharply escalated and continued the flat use rate for service upon all its customers. Consequently, the university would experience a nearly four-fold increase in rates over a three-year period.

Hoping to negotiate a better rate, the university earmarked funds to cover the additional amounts stemming from the rate increase and put them in escrow. Successful negotiations, however, did not materialize. The city threatened to cut off service to the university if full payment was not made.

The university responded by suing the city, seeking declaratory, injunctive, and compensatory relief. During the first part of this skirmish, district court judge Lynne E. Brady found that the 1977 contract had expired. The judge refused to grant the university injunctive relief to prevent the city from shutting off its service and to allow the university to escrow earmarked funds to pay the rate increase. The judge concluded the university had an adequate remedy of law: compensatory relief if the rate increases were set aside.

District court judge Van D. Zimmer tried the balance of the case later, finding that the university had not established the rate increases were unreasonable, arbitrary, and unlawfully discriminatory. It is from this ruling that the university has appealed.

I. Before considering the merits of this appeal, we think it would be instructive to mention constitutional and statutory provisions that are relevant.

Iowa municipalities were granted home rule by constitutional amendment in 1968 which provides:

Municipal corporations are granted home rule power and authority, not inconsistent with the laws of the general assembly, to determine their local affairs and government, except that they shall not have power to levy any tax unless expressly authorized by the general assembly.

The rule or proposition of law that a municipal corporation possesses and can exercise only those powers granted in express words is not a part of the law of this state.

Iowa Const. art. III, § 38A.

This constitutional grant is implemented through Iowa Code section 364.1 (1985), which provides:

A city may, except as expressly limited by the constitution, and if not inconsistent with the laws of the general assembly, exercise any power and perform any function it deems appropriate to protect and preserve the rights, privileges, and property of the city or of its residents, and to preserve and improve the peace, safety, health, welfare, comfort, and convenience of its residents. This grant of home rule powers does not include the power to enact private or civil law governing civil relationships, except as incident to an exercise of an independent city power.

Iowa Code section 384.81 permits a city to construct and maintain a city utility system. Revenue for operating such a system is generated through section 384.84(1), which pertinently provides that

[t]he governing body of a city utility ... may establish, impose, adjust, and provide for the collection of rates to produce gross revenues at least sufficient to pay the expenses of operation and maintenance of the city utility ... and, when revenue bonds ... are issued and outstanding pursuant to this division, shall establish, impose, adjust, and provide for the collection of rates to produce gross revenues at least sufficient to pay the expenses of operation and maintenance of the city utility ... and to leave a balance of net revenues sufficient at all times to pay the principal and interest ... and a sufficient portion of net revenues must be pledged for that purpose. Rates must be established by ordinance of the council.

The governing body of a city utility is, of course, the city council. See Iowa Code § 364.2(1) (1985). So the authority to set rates for a city utility rests with the city council.

Although a comprehensive system of public utilities regulation is mandated by Iowa Code chapter 476, municipally owned utilities are specifically exempted from regulation under this chapter except in certain instances not relevant here. See Iowa Code § 476.1B (1987). Iowa Code section 388.6 sets out the only statutory limitation on a city's power to set utility rates: "A city utility ... may not provide use or service at a discriminatory rate, except to the city or its agencies, as provided in section 384.91." Iowa Code § 388.6 (emphasis added).

II. Iowa Code section 388.6 codifies only one common law limitation on a city's power to set utility rates: that such rates not be discriminatory. Other common...