Opinion
No. 7,375.
Submitted March 30, 1935.
Decided April 22, 1935.
Cities and Towns — Public Utilities — Gas Franchise — Exaction of Payment of Per Cent. of Gross Receipts not "Tax" — Transaction a Contract — Effect of Enactment of Public Service Commission Law — Order of Commission Discontinuing Payment not Retroactive — Rebates — Discrimination — Estoppel — Evidence. Cities and Towns — Gas Franchise Ordinance — Requirement That Company Pay Per Cent. of Gross Receipts not Imposition of Tax — Nature of Ordinance. 1. A franchise ordinance requiring a gas company to pay a certain per cent. of its gross receipts for the privilege of conducting its business within and adjacent to a city, held not invalid as in effect imposing a "tax" upon the company for the purpose of raising revenue; the ordinance and its acceptance by the company amounted to no more than a contract under which the company was permitted to use the city streets for laying its pipes and appliances in payment of the rental represented by the per cent. of its gross receipts. Same — Gas Franchise Ordinance — Effect of Act Creating Public Service Commission on Validity of Ordinance. 2. An ordinance of the above nature granting a public utility franchise after the enactment of the Public Service Commission Law is not invalid merely for the reason that such Act vests exclusive jurisdiction in the commission, but is valid until the commission sees fit to act; until then the rate of compensation payable by the company is valid and binding. Same — Holder of Gas Franchise Estopped to Question Validity of Ordinance After Many Years of Operation Under It. 3. Where a natural gas company had for thirteen years paid a certain percentage of its gross receipts to a city under the terms of a franchise with knowledge of the existence of the Act placing public utilities under the supervision of the Public Service Commission, and then refused to continue payments on the ground that the ordinance was invalid, it will be held estopped to question its validity in the absence of action on the part of the commission. Same — Order of Public Service Commission Directing Discontinuance of Yearly Payment of Gross Receipts to City not Retroactive — Action to Recover Payment. 4. An order of the Public Service Commission relieving the gas company above referred to from payment of the annual charge exacted under the contract evidenced by the franchise ordinance as rental for the use of the city streets, did not operate retroactively so as to relieve the company of payments due for two years prior to the date of the order; the contract between the city and the company having been legal, the city was entitled to recover for the period prior to the time the commission took action directing the discontinuance of the payment. Same — Public Utilities — What Does not Constitute Rebates or Discrimination. 5. The ordinance referred to above, under which the gas company was required to pay a certain per cent. of its gross receipts for the privilege of using the city streets for laying its pipes was not illegal as discriminatory or as granting a rebate to the city, a user of gas, it appearing that the municipality was not by the ordinance granted free gas but paid for the commodity at the same rates exacted from other consumers. Same — Gas Franchise — Action to Recover Annual Payments for Privilege of Operating in City — Evidence — Nonprejudicial Error. 6. In an action by a city to recover a percentage of the gross receipts of a gas company exacted under the terms of its franchise, testimony relating to a preliminary ordinance submitting the question of granting the franchise to the voters, and referring to representations made to the city by the company as to the advantages that would accrue to it from a granting of the franchise, held immaterial and, therefore, its admission nonprejudicial.
Appeal from District Court, Fallon County; Stanley E. Felt, Judge.
Messrs. Hildebrand Warren, for Appellant, submitted a brief; Mr. Raymond Hildebrand argued the cause orally.
Mr. D.R. Young, for Respondent, submitted a brief and argued the cause orally.
That portion of the franchise ordinance which imposed upon defendant a gross proceeds tax does not constitute a valid, enforceable contract. The city instituted this action to recover from defendant money it alleges is due it by reason of the provisions of section 6 of the franchise ordinance providing for the payment to the city of a certain percentage of the proceeds derived by the utility from the sale of natural gas. The city at time of enactment of franchise ordinance had no authority to impose the gross proceeds tax. The city has only such authority as is granted by law, either in express terms or by necessary implication. Every doubt as to the existence of a particular power must be resolved against the right of the city to exercise it. (43 C.J. 186; Wibaux Imp. Co. v. Breitenfeldt, 67 Mont. 206, 215 P. 222; State ex rel. City of Butte v. Police Court, 65 Mont. 94, 210 P. 1059; Milligan v. City of Miles City, 51 Mont. 374, 153 P. 276, L.R.A. 1916C, 395; City of Helena v. Kent, 32 Mont. 279, 80 P. 258, 4 Ann. Cas. 235; State ex rel. Quintin v. Edwards, 40 Mont. 287, 106 P. 695, 20 Ann. Cas. 239; McGillic v. Corby, 37 Mont. 249, 95 P. 1063, 17 L.R.A. (n.s.) 1263.) In this case, where the city seeks to enforce payment of a gross proceeds tax, it has the burden of proving its authority to levy and collect such a tax. ( State ex rel. Billings v. Billings Gas Co., 55 Mont. 102, 173 P. 799.)
The sole and only purpose of section 6 was to provide revenue for the city. "If this license tax was in fact imposed for purely revenue purposes and not for regulation its enactment was an illegal act. * * *" ( Reilly v. Hatheway, 46 Mont. 1, 125 P. 417; Johnson v. City of Great Falls, 38 Mont. 369, 99 P. 1059, 16 Ann. Cas. 974; State ex rel. City of Bozeman v. Police Court, 68 Mont. 435, 219 P. 810.) If the city was without power to make the contract, it is axiomatic that it is equally without power to enforce the contract. ( Central Transport Co. v. Pullman's Palace Car Co., 139 U.S. 24, 11 Sup. Ct. 478, 35 L.Ed. 55; Board of County Commrs. v. Lafayette etc. R.R. Co., 50 Ind. 85.)
Compliance with the provisions of section 6 of the franchise required the commission of a public offense. The object contemplated was illegal, contrary to public policy and void. In 1913, three years before the city granted the franchise in question, the legislature enacted Chapter 52 of the Laws of 1913, creating the Public Service Commission and investing it "with full power of supervision, regulation and control of such utilities, subject to the provisions of this Act, and to the exclusion of the jurisdiction, regulation and control of such utilities by any municipality, town or village." Section 8 of Chapter 52, which is embodied in section 3888 of the 1921 Revised Codes, provides punishment by fine for violation of section 12, which prohibits the giving of rebates. Under the provisions of section 6 of the franchise ordinance, the defendant is required to pay to the city a certain percentage of the total moneys it receives from the sale of its gas at Baker. The money which the section requires the utility to pay to the city is a part of the money which the utility collects from its customers. When it is paid to the city it is used by the city for general municipal purposes. Consequently, those residents and taxpayers at Baker who use natural gas pay a greater share of the cost of running the city government than is paid by those residents and taxpayers who do not use gas. A clear discrimination exists in favor of the nonuser of gas and against the user of gas. A greater burden of supporting the municipal government is placed upon those who use gas than is shouldered by those who do not use gas. The payment by the utility to the city of the amount required by section 6 of the ordinance constitutes a rebate and concession which directly affects the rates which the utility charges its other customers for its product. It constitutes a rebate and concession or special privilege to the city, a consumer, which directly has the effect of changing the rates, charges and payments of the utility, and constitutes a direct violation of the provisions of section 3892 of the 1921 Code. That this constitutes a discrimination cannot be questioned. ( United States Smelting, R. M. Co. v. Utah Power Light Co., 58 Utah, 168, 197 P. 902, P.U.R. 1921B, 837; Salt Lake City v. Utah Light Traction Co., 52 Utah, 210, 173 P. 556, 3 A.L.R. 715, P.U.R. 1918F, 377; Union Portland Cement Co. v. Public Utilities Commission, 56 Utah, 175, 189 P. 593; Murray City v. Utah Light Traction Co., 56 Utah, 437, 191 P. 421; City of Billings v. Public Service Commission, 67 Mont. 29, 214 P. 608.) No citation of authority is required in support of the principle that every agreement or bargain is illegal if its performance is criminal or opposed to public policy. (Restatement of the Law, sees. 512 and 580.)
We understand that the plaintiff does not claim that section 6 of the franchise ordinance is legal, but asserts that it is enforceable until it is invalidated by an order of the Public Service Commission. This misconstruction of the law is based, no doubt, upon the language employed by this court in the case of City of Helena v. Helena Light Ry. Co., 63 Mont. 108, 207 P. 337, where it was held that until the state had acted the obligation of the railway company to operate a certain line existed. This case is not in point. In the Helena v. Helena Light Ry. Co. Case the franchise was enacted prior to the creation of the Public Service Commission and the Act creating the commission expressly provided that all existing rates for service should remain in effect until changed by the commission. In the Helena Case no question as to the legality of the contract at the time of its enactment was involved. In the case at bar the franchise ordinance was enacted after the state had withdrawn from cities all authority to regulate utilities and had declared the doing of the Act required by section 6 of the franchise ordinance a crime.
It will, no doubt, be urged that the franchise ordinance and its acceptance constituted a contract. It is true that in the case of State ex rel. City of Billings v. Billings Gas Co., supra, this court held that a franchise granted by the city of Billings to a gas company in 1912 (which was before the creation of the Public Service Commission), and which contained a schedule of rates constituted a valid contract, but it also held that such contract was subject to impairment whenever the state chose to exercise its right to control utilities. The court in that case held that the acceptance of the franchise constituted a contract only where the city had a right to contract. Here, as we have pointed out, the city did not have the right to contract. We do not understand that a city has any more right than an individual to enter into a contract which is violative of public policy or in direct violation of the express provisions of a statute. Moreover, in the Billings Case the franchise was granted before the creation of the commission and in the case at bar the franchise was granted after the state had seen fit through the creation of the commission to exercise its power to regulate utilities.
The following authorities are pertinent to some of the issues involved in this appeal: Postal Telegraph Cable Co. v. Taylor, 192 U.S. 64, 24 Sup. Ct. 208, 48 L.Ed. 342; City of Kenosha v. Kenosha Home Telephone Co., 149 Wis. 338, 135 N.W. 848; Wisconsin Telephone Co. v. Milwaukee, 126 Wis. 1, 104 N.W. 1009, 110 Am. St. Rep. 886, 1 L.R.A. (n.s.) 581, 587; Public Service Electric Co. v. Board of Public Utility Commrs., 87 N.J.L. 128, 93 A. 707; Home Telephone Telegraph Co. v. Los Angeles, 211 U.S. 265, 29 Sup. Ct. 50, 53 L.Ed. 176; Worcester v. Worcester Consolidated Street Ry. Co., 196 U.S. 539, 25 Sup. Ct. 327, 49 L.Ed. 591.
Defendant takes the position that the portion of the franchise in question does not constitute a valid and enforceable contract. Our position is the reverse. Defendant's brief discusses at some length ordinances imposing license and occupational taxes for purely revenue purposes. The case presents a situation where the defendant made an offer, by presenting the franchise already drafted and containing the provision for payment of the gross receipts tax in question. In effect, defendant thereby offered to pay these percentages for the privilege of using the streets and alleys in plaintiff city for its mains. The city accepted the offer, voted favorably and the franchise was granted. The defendant subsequently filed a written acceptance of the franchise containing these provisions. The resulting relationship is purely contractual, involving none of the features of a license or occupational tax purely for revenue purposes. The use of the streets and the inconvenience to the general public resulting from the digging up of the streets to lay mains and service connections, and from occasional repair work, coupled with the franchise granting the right to use streets and alleys for these mains and carrying on defendant's business, certainly constituted a valid consideration. Our position in this respect is fully sustained by the authorities. (See 26 C.J. 1022; 12 R.C.L. 193; State ex rel. City of Billings v. Billings Gas Co., 55 Mont. 102, 173 P. 799; Hanford Gas Power Co. v. City of Hanford, 163 Cal. 108, 124 P. 727; San Francisco-Oakland Terminal Rys. v. Alameda County, 66 Cal.App. 77, 225 P. 304.)
Defendant takes the position that compliance with the gross receipts tax provision required the commission of a public offense. It bases this contention upon the fact that the statute creating the Public Service Commission was in effect about three years before the granting of the franchise. It claims that the gross receipts tax amounted to a rebate, concession or a special privilege to a consumer, which had the effect of changing rates and charges. We cannot see that there is any foundation whatever for this claim. It is true that the city was a consumer of defendant's gas, paying the same rates for such gas used as any other consumer. The status of the city, as a consumer of gas, was entirely separate and distinct from its capacity as a contracting party under the gas franchise. An entirely different situation is presented in the decision most relied upon by the defendant, City of Billings v. Public Service Commission, 67 Mont. 29, 214 P. 608. In that case the city was, by the franchise, granted free gas, which directly and without question constituted a rebate and special privilege which had the effect of changing rates, tolls and charges. So far as we can see, the dual capacity of the city as a consumer and as the grantor of the franchise became so hopelessly commingled by the franchise provision that it could not be said that the city acted in the one capacity as grantor of the franchise and in another capacity as a consumer.
But, says the defendant, the city and the defendant had no right to enter into a franchise contract without first having the approval of the Public Service Commission as to all of its provisions. In that connection we respectfully call the court's attention to the decision in State ex rel. City of Billings v. Billings Gas Co., supra. There the court recognized that the city had an absolute right to contract with a utility, and that such contract was binding until the Public Service Commission exercised its authority. (See, also, City of Helena v. Helena Light Ry. Co., 63 Mont. 108, 207 P. 337; Huffaker v. Town of Fairfax, 115 Okla. 73, 242 P. 254; Shaffer Oil Refining Co. v. Creek County Gas Co., 114 Okla. 258, 246 P. 630; American Indian Oil Gas Co., v. Geo. F. Collins Co., 157 Okla. 49, 9 P.2d 438; Woodburn v. Public Service Commission, 82 Or. 114, 161 P. 391, Ann. Cas. 1917E, 996, L.R.A. 1917C, 98.) If the authority of the commission exists as to changes in prospect only and cannot be retroactive as to franchise rate provisions, then the same thing is true as to franchise provisions for payment of percentages of gross receipts. We are unable to find any authority for considering the order of the commission in the instant case as retroactive in effect. The commission exercised its power on December 31, 1932, and by the order of May 25, 1933, explicitly provided that it should affect only such percentage payments as accrued subsequently to December 31, 1932. The percentage payments involved in this action accrued during the years 1930 and 1931. It appears to us that defendant's contention that the order of the Public Service Commission took effect three years before it was made is absolutely untenable, and is, in fact, frivolous.
In the year 1916 the city of Baker enacted a gas franchise ordinance, granting to Montana Petroleum Company, a corporation, a franchise to install and operate within or adjacent to the city a gas plant and to lay and maintain conduits, mains, fixtures and other apparatus for supplying and transmitting natural or artificial gas into the city, and in and through the streets, avenues, alleys or public grounds thereof. The franchise included the ordinary provisions common to such grants and ordinances. It imposed upon the parties usual conditions. There is no question raised here as to the legality or effect of the franchise in most of its essential parts. There is, therefore, no reason to discuss the provisions of the ordinance at length.
Section 6 of the ordinance provided for the payment by the corporation to the city of a percentage of the gross income received from sales of gas. The amount was to be paid annually and was as follows:
"When the receipts from the sale of such gas shall equal $10,000 and less than $15,000 per annum, 1 per cent. of such receipts.
"When the receipts from the sale of such gas shall equal $15,000 and less than $20,000 per annum, 2 per cent. of such receipts.
"When the receipts from the sale of such gas shall equal $20,000 and less than $25,000 per annum, 3 per cent. of such receipts.
"When the receipts from the sale of such gas shall exceed the sum of $25,000, 5 per cent. of such receipts."
The defendant accepted the terms of the ordinance and installed a gas distribution system shortly thereafter, and has operated the same as a public utility ever since. The percentages were paid annually in accordance with the provision for all years up to and including the year 1929. No payments were made for the years 1930 and 1931. The amount claimed by the city for the year 1930 was $726.90, and for the year 1931 was $642.96. It instituted this action for the collection of these amounts. The complaint is in the ordinary form; a copy of the ordinance is attached to it as an exhibit.
Defendant filed answer, admitting the enactment of the ordinance, the acceptance of it after its enactment, that the ordinance went into effect, and was still in full force and effect, except as to the provisions of section 6, which provide for the percentage payments to the city. The answer contains two affirmative defenses. The first one is to the effect that at the time of the enactment of the ordinance, the Public Service Commission Act of the state — sections 3879 et seq., Rev. Codes 1921 — was in full force and effect, and that by virtue of that Act the Public Service Commission had sole and exclusive power and authority of supervising, regulating and controlling public utilities, to the exclusion of jurisdiction, regulation and control thereof by any municipality, town or village; that the Act declared it unlawful for any public utility to grant any rebate, concession or special privilege to any consumer or user of the commodity which directly or indirectly affected a change of the rates, tolls or charges of the public utility; that the city was without power to enact section 6 of the ordinance, and that the same was invalid, unlawful and not binding; that the city was without right to collect the percentages from the company; that the provisions of the section constituted a rebate, concession or special privilege and were therefore unlawful; that no consideration existed for the granting of the ordinance; that the sole purpose and intent of section 6 was to secure the sums therein directed to be paid; that the section is against public policy, unlawful, invalid, and void; and that no amount is due thereunder.
The second affirmative defense pleaded that subsequent to the enactment of the ordinance, and on November 25, 1932, the company applied to the Public Service Commission of the state for an order relieving it from paying any amounts to the city under section 6, and that thereafter the commission did make an order relieving the company from further payments by reason of the provisions of section 6. Copies of the application to the commission, the answer thereto, and the order of the commission were attached to the pleadings as exhibits.
The cause was tried to the court without a jury. Both sides submitted requests for findings of fact and conclusions of law and judgment. The court made findings and conclusions generally favorable to the plaintiff, and caused to be entered judgment in accordance therewith for the amount demanded in the complaint. The appeal is from the judgment.
Defendant, appellant here, has made and urges fourteen assignments of error, and has grouped these assignments for discussion in its brief. It is not necessary to discuss all of these assignments. As grouped, they tender the following questions:
1. That section 6 of the ordinance imposed a gross proceeds tax and, as such, was invalid and did not constitute a valid enforceable contract.
2. Alleged error on account of the admission of a certified copy of an ordinance providing for the calling of the special election, and evidence as to what influenced voters at the election on the franchise ordinance, and that other applications for a franchise had been made to the city.
At the outset defendant contends that section 6 imposed upon [1, 2] it a gross proceeds tax for revenue purposes only. This contention is followed by considerable argument upon the proposition that a city cannot impose a tax upon a business or occupation purely for revenue purposes, citing Reilly v. Hatheway, 46 Mont. 1, 125 P. 417, Johnson v. City of Great Falls, 38 Mont. 369, 99 P. 1059, 16 Ann. Cas. 974, and State ex rel. City of Bozeman v. Police Court, 68 Mont. 435, 219 P. 810.
If the provisions of the franchise in question did constitute the imposition of a tax as defendant suggests, then undoubtedly the rule contended for and the authorities cited in support thereof would be applicable and controlling. However, we are unable to agree with defendant's assertion that section 6 of the franchise imposed a tax for revenue purposes upon defendant. The relationship between the parties with reference to the franchise and its provision for a gross receipts tax is contractual and is to be distinguished, on that ground, from cases of purely revenue producing ordinances calling for license or occupational taxes. ( Hanford Gas Power Co. v. City of Hanford, 163 Cal. 108, 124 P. 727; San Francisco-Oakland Terminal Rys. v. Alameda County, 66 Cal.App. 77, 225 P. 304; Huffaker v. Town of Fairfax, 115 Okla. 73, 242 P. 254.) It is generally held that conditions such as that imposed in this franchise are not a tax or license, but rather in the nature of rental or compensation for the use of streets. ( Asbury Park S.G.R. Co. v. Neptune, 73 N.J. Eq. 323, 67 A. 790; City of Mitchell v. Dakota Central Tel. Co., 25 S.D. 409, 127 N.W. 582; Plattsburg v. People's Tel. Co., 88 Mo. App. 306; City of Newport v. South Covington C. St. R. Co., 89 Ky. 29, 11 S.W. 954; 4 McQuillin on Municipal Corporations, p. 3452, sec. 1645.)
The relation created between the city and the company was contractual in character, and the ordinance granting the franchise and providing for the percentage payments should be construed as a contract between the parties. ( State ex rel. City of Billings v. Billings Gas Co., 55 Mont. 102, 173 P. 799, 800, 1918F, P.U.R. 768; 12 R.C.L. 193; Hagerla v. Mississippi R. Power Co., (D.C.) 202 Fed. 776; 26 C.J. 1022.)
It is contended that even if this franchise is held to be a contract, there is still a total want of consideration for the conditions imposed upon defendant. The only possible theory upon which this contention can be sustained is that the city had no power or authority to make such a contract or to impose such conditions upon defendant in consideration of the grant of a franchise. As we shall hereinafter point out, the conditions imposed by the franchise ordinance were not absolutely illegal and void. Therefore the position taken by defendant in this respect is not tenable.
The case of Huffaker v. Town of Fairfax, supra, is almost identical, upon the facts presented, with the case at bar. In that case it was urged, just as it is here, that the provisions of the franchise ordinance setting the rate at which electricity should be furnished were illegal, for the reason that the Public Service Act enacted prior thereto vested exclusive jurisdiction of such matters in the Public Service Commission. The Oklahoma supreme court held that such a contention was untenable. It held that the city had the power and authority to make such a contract, although it was subject to the superior jurisdiction of the state, through the Public Service Commission, at any time it saw fit to act in the premises; but that until the state (through the commission) chose to act in the matter, the contract existing between the city and the utility was valid and binding. Again, in the case of Shaffer Oil Ref. Co. v. Creek County Gas Co., 114 Okla. 258, 246 P. 630, 637, it was held that: "The contract referred to is only void in the sense that it cannot stand against impairment by order made by the Corporation Commission upon its authority being invoked to do so. In other words, the contract falls when the Corporation Commission sees fit to alter the rate or fix a different rate."
The same conclusion was announced by this court in City of Helena v. Helena Light Ry. Co., 63 Mont. 108, 207 P. 337, 340, wherein it was said: "It is our conclusion that the state may, through the Public Service Commission, relieve the railway company of its contract obligation to operate the Kenwood Line, or a part of it, during the entire period covered by the franchise, but that, until the state has acted in the premises, the obligation is a continuing one, which the city is entitled to have discharged."
While our Public Service Act does vest the state with the right and power to regulate rates, such a power must not be confused with the right of a city to exercise its contractual power to agree with a public service company upon the terms of a franchise. ( Woodburn v. Public Service Commission, 82 Or. 114, 161 P. 391, Ann. Cas. 1917E, 996, L.R.A. 1917C, 98; Salt Lake City v. Utah Light Traction Co., 52 Utah, 210, 173 P. 556, 3 A.L.R. 715.)
In the case of State ex rel. Billings v. Billings Gas Co., supra, this court had occasion to construe a franchise similar in many respects to the one here under consideration. The court said: "The right granted to the company to use the streets for laying its mains is a franchise. * * * The acceptance of the franchise, which contained terms, constituted a contract between the city and the company, if the city had authority to make such contract." The court then proceeded to a discussion of the right of the city to contract and cited the statutory authority existing in this state supporting the right of the city in that respect. It discussed the authority of the Utilities Commission, particularly with relation to the fixing of rates. In the Billings Case the franchise ordinance was enacted before the passage of the Public Utilities Act. Here the Act was in effect when the franchise contract was entered into. Whereas it was claimed that the Billings franchise contract was rendered illegal by the enactment of the Public Utilities Act, appellant here asserts that the agreement to pay the percentage to the city amounted to a rebate, or a special privilege, and thereby rendered the contract void ab initio, and that because the matter of rates was included in the franchise, the provision was rendered illegal.
In the Billings Case, supra, the court discussed the question of the right to fix rates. It considered subsections 63 and 73 of section 3259, Revised Codes of 1907 (sec. 5039, Rev. Codes 1921), wherein it is provided that the city has the power to make any and all contracts necessary to carry into effect the powers granted by the title and to provide the manner of executing the same, and to permit the use of streets for the purpose of laying down water, gas and other mains, etc. The court declared that rate regulation of public utilities is distinctly a legislative function of the state, and discussed the decisions on the point. It pointed out that the cases are not harmonious but in a general way fall into three distinct groups: (1) Those holding that statutes of the character under consideration do not confer any rate-making power whatever. (2) Those holding that such statutes by necessary implication confer the power to fix rates under certain circumstances. And (3) the group that holds that statutes of this character do not confer directly any rate-making authority, but they do amount to a sort of tacit recognition by the state of the city's right to contract for rates, subject, however, to the paramount authority of the state whenever it chooses to exercise its sovereign power of rate regulation. The court adopted the third theory and declared that it was not the purpose of the legislature, by the very general language of the paragraphs of the Act, to surrender fully the distinctively governmental function to regulate rates, but rather to permit municipalities to protect themselves and their inhabitants against exorbitant rates until the state itself should act in the premises. In the discussion of this subject, the court said: "Under this view it cannot be said that the Act of 1913 impairs the obligation of the franchise contract * * * for both parties to that agreement must have entered into it with full knowledge that in the state itself reposed the sovereign power of rate regulation."
Here the Utilities Act was in full force and effect when the contract was entered into, and both parties must be held to a full understanding of its import. The rates fixed in the franchise ordinance could not have been effective or controlling without the acquiescence of the state through the commission. While the record does not disclose the fact, the law required that the schedule of rates should be filed with the commission, and we must assume that the provisions of the law were observed. ( State ex rel. City of Billings v. Billings Gas Co., supra.) Indeed, section 6 of the franchise in legal effect did no more than tender to the commission for its consideration and adoption a schedule of rates agreeable to both the city and the company. There was nothing illegal about that. When those rates were approved by and filed with the commission, they became the legal rates and were such until changed in the manner provided by the Public Service Act. ( State ex rel. City of Billings v. Billings Gas Co., supra.)
In the case of Billings Utility Co. v. Public Service Commission, 62 Mont. 21, 203 P. 366, 368, this court quoted with approval language from another court, as follows: "The findings of the Commission are made by law prima facie true, and this court has ascribed to them the strength due to the judgments of a tribunal appointed by law and informed by experience." So it would appear that in reality all of the collections made under the rates of the company as designated in the franchise were in accordance with rates approved and fixed by the commission. It may be true that the rate as first fixed by the franchise and later adopted and approved by the commission was erroneous, and that in the base upon which the rate structure was founded there was something that should not have been included.
The rate structure is primarily based upon the value of the property involved, the expenses of operation, and the theory of a fair return on invested capital. If there is something erroneous included in the rate structure, it, of necessity, will be reflected in the rates; but that fact does not render these rates as applied to the general public or as they affect the franchise schedule as applied to the city fraudulent and void. The rate was legal, not because it was agreed upon between the city and the company, but essentially because it was approved by the commission, and so legal until changed. To express it in another way, the rate here was subject to direct attack in a proceeding before the commission, but was not vulnerable to collateral attack as attempted in this action.
We are of the opinion that the franchise provision did not violate the provisions of the Public Utilities Act, for the very reason that the matter now the subject of complaint and the issue in this case was included in a legal rate schedule adopted by the commission. (See Billings Utility Co. v. Public Service Commission, 62 Mont. 21, 203 P. 366; City of Billings v. Public Service Commission, 67 Mont. 29, 214 P. 608; City of Helena v. Helena Light Ry. Co., 63 Mont. 108, 207 P. 337; Huffaker v. Town of Fairfax, supra; American Indian Oil Gas Co. v. Geo. F. Collins Co., 157 Okla. 49, 9 P.2d 438.) We are fortified in this conclusion by the general rule [3] applicable in such cases that: "The assumption of a franchise and the exercise of rights which can only be exercised thereunder will constitute an estoppel to deny the existence of such franchise for the purpose of defeating claims arising by reason of the existence of such franchise, or defending an action brought by reason of the existence of such franchise. One may be estopped to deny that he held a special franchise when by his actions he apparently recognized that he was exercising the franchise right under a grant from the public authorities." (26 C.J. 1029, and cases cited.)
In so far as the right of the city to contract in the circumstances is concerned, we are impressed with the fact that the company is not in a position to repudiate the contract at this late date. It is not without significance that the company accepted and acceded to the terms of the ordinance and that it proceeded to act in accordance with it and its terms over a period of several years, and that finally when it did seek to avoid the provisions of section 6, it applied to the commission for relief. It is not in a good position to assert the invalidity of the contract after the lapse of so long a time.
The United States Circuit Court of Appeals for the Seventh District employed very pertinent language in a situation somewhat similar to this, wherein it discussed the powers and authority of a city. It was there said: "When a municipal corporation has the power to grant or refuse in its discretion permission to a public service company to occupy the streets with its structures, it may grant such permission subject to such conditions as it may see fit to impose, provided they are not against public policy or in derogation of any right which the company may have under its franchise from the state. The municipality, by means of such conditions, may impose obligations upon the company which it would have no power or authority to impose under its general charter powers, and, if the company accepts the grant, it is bound by the conditions, and is estopped to question their validity." ( Todd v. Citizens' Gas Co., (C.C.A.) 46 F.2d 855, 866, and authorities therein cited.)
It has been quite generally held, in cases such as this, that where the utility company has accepted a municipal franchise, performed the terms exacted by the city in consideration for the franchise for a long period of time, and enjoyed the benefits for which it agreed to pay the amount prescribed, it is estopped from attacking a single provision of the franchise as ultra vires on the part of the city. (See City of Jamestown v. Pennsylvania Gas Co., (C.C.A.) 1 F.2d 871, P.U.R. 1925C, 97; Hartford v. Connecticut Co., 107 Conn. 312, 140 A. 734, P.U.R. 1928D, 447; Davenport v. Meyer Hydro-Electric Power Co., 110 Neb. 367, 193 N.W. 719; New York, W. B.R. Co., P.U.R. 1931A, 368; Chicago Gen. Ry. Co. v. City of Chicago, 176 Ill. 253, 52 N.E. 880, 68 Am. St. Rep. 188, 66 L.R.A. 959; 4 McQuillin on Municipal Corporations, p. 3570, sec. 1688, and numerous cases cited.)
The fact that the commission by its order in November, 1932, [4] eliminated the charge imposed upon defendant by section 6 of the franchise, does not aid defendant in this case, because plaintiff is seeking only to recover for a period (1930 and 1931) prior to the time when the order was made. The order eliminating the charge was not retroactive. It was manifestly and necessarily prospective only.
Having found that the contract was not illegal and void from the date of its inception, it follows that until the state acted in the premises, the obligation was a continuing one which the city is entitled to have discharged. ( City of Helena v. Helena Light Ry. Co., supra.) Certainly, under the authorities to which we have already adverted, it would not be contended that an order of the commission changing the rates to be charged should operate retroactively. As we have pointed out, the charge in question was presumably one of the expense items upon which the rates were based. Hence there is no more reason for holding that an order eliminating that charge should operate retroactively than there is for holding that an order changing the rates should have retroactive effect.
Defendant relies, in the matter of alleged discrimination, [5] upon the case of City of Billings v. Public Service Commission, supra; but in that case the ordinance under consideration provided that the city was granted free gas. Here there is no such provision. Here the ordinance does not provide that the city shall be given any preference in the matter of rates or free service.
It is urged that the city was interested as a user of gas, and that therefore there was discrimination in its favor as such; but the fact is that while the city is a user, it paid for its gas at the same rate as any other user. This fact distinguishes the case from the City of Billings Case, just cited.
The company complains because the court admitted in evidence [6] the preliminary ordinance having to do with the matter of the submission of the question of the granting of the ordinance to the voters of the city. It also complains because the court received testimony as to the representations made by it to the city relative to the advantages that would accrue to the city and its inhabitants by the enactment of the ordinance and the acceptance of the proposition of the company as it was later embodied in the franchise ordinance. None of these matters seem to us of any importance. As we view the case, it makes no particular difference what the reasons for the adoption of the ordinance were. It is immaterial whether the city or the company was most anxious to enter into the contract. Neither is it of any great consequence that the question of the payment of a certain percentage of the income derived from the sale of gas should have been an inducement to the voters in voting for the ordinance. These matters are obviously unimportant here, in view of the fact that neither party is attacking the franchise ordinance in any particular, except as to the percentage payment provisions of section 6. The defendant does not question the franchise feature, but very apparently wishes to uphold it and is continuing to do business under it. The questioned evidence might have been important if this action involved an attempt to set the ordinance aside as a whole, but we fail to see where or how defendant could have been prejudiced in this action.
After carefully considering all the assignments of error, we are of the opinion that there was no reversible error in the case. The judgment was properly entered and it is affirmed.
ASSOCIATE JUSTICES MATTHEWS, ANDERSON and MORRIS concur.
MR. CHIEF JUSTICE SANDS, being absent on account of illness, did not hear the argument and takes no part in the foregoing decision.