# Crownhill Homes, Inc. v. City of San Antonio

> Court of Appeals of Texas · August 8, 1968 · 433 S.W.2d 448

URL: https://www.frixlaw.com/law-library/cases/9653212

## Case

- **Full name:** CROWNHILL HOMES, INC., Appellant, v. CITY OF SAN ANTONIO Et Al., Appellees
- **Court:** Court of Appeals of Texas
- **Decided:** August 8, 1968
- **Citations:** 433 S.W.2d 448; 1968 Tex. App. LEXIS 2206
- **Precedential status:** Published
- **Opinion:** Dissent by Sharpe
- **Judges:** Nye, Sharpe
- **Cited by:** 22 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/9653212

## How later opinions describe it (automated extraction)

- describing "off-site or approach mains" and distinguishing "on-site or local benefit mains"

## Opinion text

SHARPE, Justice
(dissenting).
I respectfully dissent.
I would hold as follows: That the Water Board regulations which require a developer or new customer to convey water mains to the city-owned utility without compensation or promise of reimbursement as a condition of securing water service in the City’s monopoly area are invalid and unenforceable; that the Water Board in prescribing regulations concerning “on-site” mains acts in an administrative capacity relating to a proprietary function and not in the exersice of a governmental function; that whether a proprietary or governmental function is exercised by the Board in prescribing such regulations, they are invalid and unenforceable because they refuse a customer’s right to reasonable extensions of water mains, they unreasonably discriminate against developers and new customers, and they deny equal protection of the law and take property without due process of law.
In my view, appellant was entitled to declaratory judgment favorable to it determining its rights and appellees’ duties concerning extensions of “on-site” mains. I would reverse and render judgment on that phase of the case and would reverse and remand in connection with appellant’s application for mandamus for the reasons to be hereinafter discussed.
This case involves important questions concerning the operation of a city-owned water utility. In my view the majority opinion does not adequately give the setting of the case, nor does it fully state or discuss the contentions of the parties, particularly those of appellant. I am in disagreement with the material holdings of the majority opinion. The resulting differences will be discussed in the course of the opinion. I particularly am not in accord with the majority view, as I understand it, that if the issues presented here should be decided favorably to appellant, this Court would be substituting its judgment for that of appellees in determining the policies applicable to the city-owned water utility. This is not at all the case. What we are called upon to do is to determine the questions concerning the legal rights of appellant and the legal duties of appellees in the light of the contentions made. If the regulations here involved are invalid and unenforceable, as I believe is the case, it is still the function and duty of appellees to determine a valid policy to be followed by them. The decision of the Court in such case does not amount to substitution of Court judgment concerning matters which are for determination of appellees in the first instance.
The record herein consists of the Transcript containing 236 pages, the Statement of Facts containing 817 pages and approximately 250 pages of exhibits. The briefs of the parties and of Amicus Curiae contain 334 pages.
The questions presented are closely related and discussion of them overlaps. In order to facilitate consideration of the decisive issues, this opinion will be divided into sections as follows: I. The setting of the case. The regulations. The basic contentions of the parties. The findings and conclusions. Historical and factual background. II. The nature of the duty owed to its customers by a city-owned water utility in its monopoly area. III. The reasonableness in fact of a request for extension of water mains. The factors of reasonableness. The refusal of the regulations to recognize reasonable extensions. IV. Whether a proprietary or governmental function is exercised by the Water Board in promulgating regulations. Police power argument. V. The discretion to be exercised. VI. The discrimination questions. Classification of developers. VII. The due process and equal protection questions. VIII. Declaratory judgment. IX. Mandamus. X. Conclusion.
*463 I.
THE SETTING OF THE CASE. THE REGULATIONS. THE BASIC CONTENTIONS. THE FINDINGS & CONCLUSIONS. HISTORICAL AND FACTUAL BACKGROUND.
The case is before this Court on transfer by the Supreme Court from' the San Antonio Court of Civil Appeals.
This is a suit for declaratory judgment and writ of mandamus brought by appellant challenging the validity of regulations promulgated by the Water Works Board of Trustees of the City of San Antonio, Texas, imposing costs for “on-site” water mains upon developers in general, including appellant, and particularly involves an order of appellee Board of Water Trustees denying extensions as to three lots owned by appellant. The trial court sitting without a jury rendered judgment denying the relief sought by appellant and thereafter filed original and amended findings of fact and conclusions of law.
Appellant, Crownhill Homes, Inc., a corporation engaged in the business of developing and subdividing property, was plaintiff in the court below. The defendants were (1) The City of San Antonio (2) its Water Works Board of Trustees, and (3) the five members of that Board, individually, one of whom was the mayor of San Antonio. Hereafter I will sometimes refer to appellant Crownhill Homes, Inc., as “Crown-hill”, the appellee City of San Antonio as “City”, the governing body of the City as “City Council” and the Water Board of Trustees as “Water Board” or “Board”. The importance of these terrps will hereinafter be pointed out. Amicus Curiae briefs have been filed by Texas Association of Home Builders, Inc., in support of appellant’s position, and by Texas City Attorney’s Association, in support of appellees’ position. I will sometimes refer to such organizations, respectively, as “Appellant’s Amicus Curiae” and “Appellees’ Amicus Curiae”.
THE REGULATIONS
The Water Board regulations in question are entitled “Regulations for Water System Extension and Service Line Installation” originally adopted on February 23, 1960 and amended effective March 12, 1962. The regulations contain sixteen items occupying the same number of pages. The particular type of water main which is directly in issue here is an “on-site” main, defined in Item 1-G of the regulations as follows:
“An on-site main means a main to provide service within the perimeter of a property or along abutting roadways, alleys and/or utility easements.”
Otherwise stated, an “on-site” main is one from which a lot directly receives a water supply.
The regulations in Item 1-F also define an “approach main” as follows:
“An approach main means a main which brings water service and/or circulation of water to the perimeter of a property or the projection thereof across roadways abutting said property.”
The regulations attempt to classify customers into two categories: (1) Single customer, and (2) Developer-Customer. Generally, a “Single customer” is an applicant for service on one lot or property. A “Developer-Customer” is an applicant for service for development of platted subdivisions, lots or tracts “upon which more than one residential, commercial or industrial establishment is to be erected.” Item 3 of the regulations, covering 3½ pages thereof, provides in detail for extension of “on-site” mains for a “Developer-Customer”. Item 4 of the regulations provide in detail for extension of “approach mains” for a “Developer-Customer”. Under the regulations, a single customer or a developer must furnish the initial capital outlay for an “approach main” but is reimbursed by the Water Board under a revenue-refund arrangement over a period of seven years, *464 the amount of which may or may not equal 100% of the capital outlay. The arrangement as to “approach mains” is not directly in issue here. However, the regulations require that both new single customers and developers must bear the entire cost of an “on-site” main without compensation or promise of reimbursement. The regulations further, in Item 15, prohibit installation of water mains in any location other than a dedicated street, alley, public way, or utility easement running in favor of the City for the use and benefit of the Water Board. The regulations in Item 1-1 further provide that service line connections shall be made only upon compliance with various requirements which include the execution of a contract for water service. The contract provides that the facilities installed by the Developer-Customer shall unconditionally become the property of the City for the use and benefit of the Water Board and contains a formal conveyance to such effect.
The regulations also provide for other charges which must be paid by every new customer, also not in issue here. These charges include a “system charge” graduated according to meter size ranging from $10.00 for a ⅝ inch meter to $75.00 for a 6 inch and larger meter; and a service line installation charge beginning at $40.00 and increasing with the sizes of the service line and minimum size main connections.
The provisions of the regulations requiring developers to bear the entire cost of “on-site” mains without compensation or promise of reimbursement and to convey them to the City and its Water Board are directly attacked by appellant for the reasons hereinafter stated.
BASIC CONTENTIONS OF THE PARTIES
Appellant asserts 24 points of error, 18 of which complain of the conclusions of law made by the trial court holding generally that the regulations are valid and enforceable, are not discriminatory in their operation and effect, and are not violative of due process or equal protection provisions contained in the constitutions of the State of Texas and the United States of America.
Appellant’s basic contentions in substance are: That the substantive legal duties owed to its customers by a city-owned water-utility within its monopoly area are the same as those owed by a privately-owned utility, although some procedures may be different; that a city-owned water utility has an obligation to make all reasonable extensions of its mains, including “on-site” mains, considering the various factors of reasonableness; that the law makes adequate provision for the city-owned utility to finance the capital costs of such reasonable extensions; that a violation of the duty of the city-owned water utility is established here, particularly because the regulations refuse to recognize that any request for an extension of an “on-site” main can be reasonable under any conditions; that the purpose and effect of the regulations is to shift capital costs from the city-owned utility to developers and new customers; that such policy and the results thereof are unauthorized, particularly where landowners, developers and new customers are required to make a gift of water mains to the city-owned utility without compensation or promise of reimbursement; that a city-owned utility, acting through its agents, does not prescribe rules and regulations for the operation of the water system in a governmental and legislative capacity, but on the other hand, prescribes them in a proprietary capacity; that developers may be classified based upon consideration of proper factors, but not for the purpose of hostile or special legislation which unreasonably discriminates against them; and that the regulations deprive appellant and developers of due process and equal protection of the law; that appellant is entitled to declaratory judgment and mandamus.
In its supplemental brief filed after submission of this case Crownhill states the *465 “exact nature of appellant’s cause of action” to be as follows:
“Crownhill Homes is asking this Court to declare, by invalidating appellees’ regulations, that the City of San Antonio has the obligation to make all reasonable extensions of ‘on-site’ mains, and appurtenances thereto, at its expense. It does not ask the City of San Antonio to pay for all such extensions, nor does it ask that it pay for all such extensions which Crownhill Homes thinks are reasonable, nor does it ask that it pay for all such extensions any other developer might think reasonable, but it only asks that the City pay for those extensions proved to be reasonable. A fundamental corollary of the relief sought is that the City of San Antonio should adopt regulations which contain criteria of reasonableness to which all developers may turn for guidance in presenting extensions requests for the City’s consideration, and which criteria will afford a basis for judicial review of the City’s decision in the event such requests are unreasonably or arbitrarily denied.”
Appellant’s contentions are further partly summarized in the original brief of Appellant’s Amicus Curiae, in substance as follows:
“The municipal regulations which force landowners to finance, construct, and make a gift of watermain extensions to the city, are invalid as an arbitrary refusal by the city to perform its duty of making all reasonable watermain extensions.”
Appellees, by seven counterpoints as here indicated, contend that the trial court correctly ruled: (1) That the City of San Antonio in prescribing regulations governing the extension of water service acts in a legislative or governmental capacity, (2) That the determination of what extensions shall be made by a municipal water system is a matter within the sound discretion of the governing body in the exercise of its legislative and governmental powers, (3) That a city is not obligated to make all extensions but may, to the contrary, expend revenues only for extensions which in the judgment of the governing body are necessary to render adequate service, (4) That the extensions to be made and the determination of how much of the revenues of the water system should be applied to such extensions of the system is within the sound discretion of the governing body, (5) That the regulations and order in controversy are reasonable, lawful and supported by substantial evidence, (6) That appellant failed to prove that the regulations and order infringe State and Federal constitutions, (7) That appellant failed to establish grounds for mandamus. The brief of ap-pellees’ Amicus Curiae makes the following contentions: (1) The appellee acted in a legislative or governmental capacity in promulgating rules and regulations and in enacting ordinances governing the extension of water service to appellant and others similarly situated, (2) The trial court correctly held that appellant constituted a separate and distinct class for regulatory purposes and that subject ordinances, rules and regulations did not infringe the state or federal constitutions.
THE FINDINGS OF FACT AND CONCLUSIONS OF LAW
The trial court made 31 findings of fact and 32 conclusions of law, contained in 11 pages of the Transcript. The parties have briefed the questions presented largely in terms of the conclusions. In my view, a reading of the findings and conclusions makes for a much clearer understanding of the case and a copy of them is attached as Appendix A to this opinion. Some of the conclusions are not attacked. However, a number of them are complained of by appellant as being completely wrong and some others as being partly wrong and partly right but wrong on the whole. Some remaining conclusions, which are closely related to others, are placed in question because of uncertainty in meaning. The conclusions which are not attacked, and with which I am in agreement are numbers 1, *466 2, 3, 4, 9, 10, 11, and 12. The conclusions which are attacked by appellant and which I have concluded are completely erroneous are numbers 17, 19, 21, 23, 25, 26, 28, 29, 30 and 32. The conclusions which are also attacked by appellant as being erroneous on the whole, but which contain more than one conclusion and which I hold are partly right and partly wrong are numbers 5 and 7. The remaining conclusions not mentioned above are numbers 6, 8, 13, 14, 15, 16, 18, 20, 22, 24, 27, and 31. Insofar as these conclusions are material, they will be considered either along with other conclusions or separately in the course of the opinion.
If I am correct in the view that various conclusions of the trial court are erroneous, the result would be that appellant’s principal contentions should be sustained and the judgment reversed.
THE HISTORICAL AND FACTUAL BACKGROUND
Before reaching a discussion of the specific contentions in connection with the findings and conclusions of the trial court, I will set out additional matters which I consider to be necessary for a better understanding of the case and the context in which the questions presented must be decided.
The case of San Antonio Independent School Dist. v. Water Works Board of Trustees, et al, 120 S.W.2d 861 (Tex.Civ.App., Beaumont, 1938, writ refused) sets out the history of the acquisition by the City of San Antonio of its municipal waterworks and the operation of it for a period of about ten years. That case held that because the City of San Antonio (as “City” is defined in the opinion) was the owner of the Water Works System, that the properties thereof were exempt from taxation under the constitution and laws of this State, notwithstanding that management and control thereof were vested in a special Waterworks Board of Trustees. Some of the facts stated by the Court and holdings made by it will now be referred to. Prior to June 1, 1925 the water system in the City of San Antonio was owned by a private corporation. On that date the City purchased the water system pursuant to an Act of the 39th Legislature enacted March 5, 1925, (Acts 1925, Chapter 33, pages 154 — 157), codified as article 1109a, V.A.C.S. The statute was originally applicable to cities having more than 160,000 inhabitants. At the time of the decision the statute had been re-enacted and amended by the 43rd Legislature in 1933; and provisions were added to the original act making it applicable to cities having more than 290,000 inhabitants (Sec. 7, Art. 1109a). It should be noted that after said decision, Art. 1109a was further amended in 1939 and 1953. The Beaumont Court of Civil Appeals discusses Art. 1109a and generally points out the manner in which the City of San Antonio followed its provisions in its purchase of the water system. It appears that in 1925, Revenue Bonds in the total amount of $7,000,000.00, payable serially over a period of forty years, were issued in payment for the water system. A trust indenture was entered into under which the Water Works Board of Trustees, consisting of five members, was created and provision made for its operation of the system, all of which was approved by an election of the people of San Antonio. Among other things, the Court discusses the relationship between the City of San Antonio, its city council and officers, and the Water Works Board of Trustees. The holdings of the Court as to such relationship are significant. They are in part as follows:
“ * * * By vesting the management and control of the Water Works System in the Water Works Board of Trustees, the City of San Antonio did not cease to ‘hold’ the property within the meaning of the Constitutional exemption. On this point appellant insists that there can be no ‘holding’ of the Water Works property by the city when the *467 mayor, council and other municipal officers are denied all right of possession, management, or control of it. The contention overlooks the important fact that the mayor, city council, and other municipal officers are not. the City of San Antonio. They are merely the agents through which the corporate functions entrusted to them by law and the city charter are exercised. The inhabitants residing within the corporate limits, or those entitled to vote at municipal elections, are the members of the corporation and these, in connection with the territory embraced within the corporate limits, constitute the corporation. McQuillin Municipal Corporations, Vol. 1, Secs. 116 and 117, p. 286 et seq.” 120 S.W.2d 865 (emphasis supplied)
With reference to the Water Works Board of Trustees and the nature of the function performed by the City and its agents, the Court said:
“ * * * The members of the Water Works Board of Trustees are not constitutional officers. A municipal corporation is invested with two kinds of powers or functions, governmental and proprietary. Governmental functions are exercised in the administration of the affairs which affect the public generally, and are performed by virtue of powers conferred upon the city as an agency of the state. Proprietary functions pertain to business affairs administered for the special benefit of the urban community embraced vJithin the corporate boundaries. City of Beaumont v. Fall, 116 Tex. 314 , 291 S.W. 202 . The ownership and operation of public utilities belong to the latter class of powers. Community Natural Gas Co. v. Northern Texas Utilities Co., Tex.Civ.App., 13 S.W.2d 184 , and authorities cited.” 120 S.W.2d 866 . (emphasis supplied)
The record herein reflects that since the decision in San Antonio Independent School District v. Water Works Board of Trustees, supra, certain events have occurred which will now be noted.
On April 4, 1957 the City Council of San Antonio passed and approved Ordinance No. 24819, the caption of which reads as follows:
“Authorizing the issunce of $2,178,000.00 City of San Antonio, Texas, water revenue refunding bonds, series 1957, payable only out of revenues of the City’s waterworks system, for the purpose of refunding a like amount of City of San Antonio water revenue bonds dated May 1, 1925; secured by a pledge of the net revenues from the operation of the City’s waterworks system; providing for the issuance of additional parity bonds; providing for the management of the waterworks system of the city by a board of trustees, and the use and application of the revenues therefrom during the time said bonds are outstanding.”
The ordinance covers twenty pages of single-space printing and contains thirty-two Sections. Many provisions of the ordinance appear to be similar to those contained in the original 1925 trust indenture, based upon the discussion of it by the Beaumont Court of Civil Appeals in San Antonio Independent School District v. Water Works Board of Trustees, supra. However, some important changes were made by the 1957 ordinance in the general arrangement for issuance of bonds and for operation of the water system. Under the 1925 trust indenture, the trustees of the Water Board were named in it and vacancies were filled by the surviving members. Under the 1957 ordinance, the trustees are named by the City Council and vacancies filled by it; a full term for a trustee being eight years. The ordinance also makes provisions for issuance of parity bonds.
In Section 27, the ordinance expressly places with the Board the “absolute and complete authority and power with reference to the control management and operation of the system” except as otherwise *468 specifically provided therein. It further provides that the Board “may manage and conduct the affairs of the system with the same freedom and in the same manner ordinarily employed by the Board of Directors of private corporations operating properties of a similar nature.” But the ordinance also recognizes that the power of “fixing rates and charges for service rendered by the system” is in the City Council. The Board is charged with the duty of making recommendations to the City Council concerning the fixing of rates and charges, whether for an increase or reduction. Aside from the rate fixing function, the only other exceptions of any real consequence recognized by the ordinance to the complete exercise of power by the Board in management and operation of the system relate to the appointment of its members and the issuance of bonds.
The Water Board Report for 1964, in evidence herein, reflects many significant facts concerning the city-owned water utility and its operations over a period of eleven years (1954 — 1964 inclusive). Among other things, that report shows that a water revenue bond issue of $20,885,000.00 was approved by the people at an election held in 1956. At the end of 1964 all of the bonds authorized by the 1957 ordinance and additional parity bonds had been issued, with net balances of cash and receivables remaining of said bonds in the amount of $1,152,619.60. Revenue bonds outstanding at the end of 1964 amounted to $21,218,-000.00. Pertinent portions of the 1964 report are set out in Appendix B to this opinion.
Prior to February 1956 the Water Board had a policy which in substance was that developers installed mains at their initial expense and a refund-revenue contract was entered into providing that developers could earn up to 100% of such installation cost, dependent upon the revenue derived from the subdivision involved. In February 1956 appellees reduced the maximum amount refundable to 50% of the installation cost. This latter policy continued until February 23, 1960 when the Regulations now under attack were promulgated and by which the Water Board adopted a policy entirely eliminating refunds concerning “on-site” mains. The policy of refunds for “approach mains” was continued.
Appellees devote over twelve pages of their original brief to a general statement of the background and history of the operation of the city-owned water system and certain events leading up to the adoption of the regulations on February 23, 1960. Among other things appellees say that at the end of 1955, the water system was in poor financial condition; that the Board did not have sufficient cash to operate the system; that it had to use customers’ deposits for operating expenses; that it was required to borrow cash from Banks for operating expenses; that there was a financial crisis in 1956; that after passage of the 1957 ordinance the financial posture of the Board was still poor; that from 1956 to 1960 the cumulative deficit rose from $1,124,064.00 to $3,703,396.00; that from 1956 to 1960 the Board took steps to modernize, to determine future needs and to improve its financial position. As to developers, appellees say that from 1956 to 1960, after liquidations of 100% refund obligations, the Board’s obligation on the basis of a 50% refund policy for “on-site” improvements amounted to $794,000.00. Ap-pellees claim that by 1960 the Board was not in financial position to continue refunding 50% of the cost of “on-site” mains.
The record shows that prior to adoption of the Regulations in 1960, the Board considered that it had three alternatives in connection with its policy toward developers and new customers. Testimony in this connection was furnished at the trial below by Mr. William L. Patterson, appellees’ utility expert witness. He testified in part that the cost of making an extension of water-mains to new customers included “back-up facilities” consisting of wells, pumps, reservoirs, tanks, transmission mains, and vari *469 ous types of equipment; and that the cost of “on-site” mains was only a part of the total cost; that due to inflation the cost of making extensions was greater than in prior years and that the cost of serving new customers exceeds the cost of serving existing customers. He then said that there were three ways to equalize the cost differential : (1) a general increase in the rate, (2) a special rate for new customers, or (3) a contribution to capital by new customers. The Board decided to adopt the third policy, resulting in the imposition of the cost of “on-site” mains on all new customers, including developers, without compensation or promise of reimbursement. The express purpose of the 1960 Regulations was to shift capital costs of “on-site” mains to new customers and developers, and the Regulations have that effect. The new customer or developer is required to furnish the capital for “on-site” mains and convey them to the City for the use of the Board as a condition of securing water service.
Crownhill Park Subdivision, developed by appellant, is wholly within the city limits of San Antonio and has been a successful residential development since 1959. The record shows that some 200 lots have been developed or sold in it. Unit No. 8 of Crown-hill Park contains 39 lots. 36 of these have a water main adjacent to them, the cost of same having been borne partially by the Water Board and partially by appellant. The request of appellant for extension of “on-site” mains to the three remaining lots at the cost of the Board is particularly related to the question of mandamus herein. The trial court found in substance that the whole cost (including back-up facilities) of extending water service to all 39 lots in Crownhill Unit No. 8 could not be amortized from anticipated revenue. However, the trial court also found that “the cost of the installation of mains and appurtenances requested by plaintiff plus the Board’s cost in existing mains within the Unit can be amortized out of the revenue to be derived by the Board from servicing the thirty-nine lots therein.”
The population figures for the City of San Antonio as shown by the U. S. Census for the years indicated are as follows :
1850 _ 3,488
1860 _ 8,235
1870 _ 12,256
1880 _ 20,550
1890 _ 37,673
1900 _ 53,321
1910_ 96,614
1920 _ 161,379
1930 _ 231,542
1940 _ 253,854
1950 _ 408,442
1960 _ 587,718
Such facts may be judicially noted. See Texas Practice, McCormick & Ray, Evidence, Vol. 1, Sec. 203, p. 236. In addition, the above figures for the population of San Antonio were furnished to this Court on stipulation joined in by counsel for the City of San Antonio in the case of Vernon v. State of Texas, ex rel. City of San Antonio, 406 S.W.2d 236 (Tex.Civ.App., Corpus Christi, 1966, wr. ref. n. r. e.).
Pages 18 and 19 of the Water Board Report for 1964 contain financial and statistical information concerning the operation of the city-owned water utility for the eleven year period 1954 — 1964, inclusive. See Appendix B. Some of that information will now be briefly referred to. Total Revenue and other income increased from $3,833,550.00 in 1954 to $7,022,656.00 in 1964. The number of customers increased from 103,996 at the end of 1954 to 135,728 at the end of 1964, an average increase of 3173 customers annually. Total Revenue less operating expenses increased from $2,053,069 in 1954 to $4,171,045 in 1964. The average annual debt requirements increased from $436,244.00 in 1954 to $1,208,741.00 in 1964. Such increase is attributable to the bond issue of over 20 million dollars voted in 1956 and to the refunding of existing bonds in 1957, heretofore mentioned. The municipal equity, including reserves, in the water system rose from $13,890,064.00 in 1954 to $34,815,490.00 in 1964. The total *470 utility plant in service, including construction in progress and equipment-working capital fund, is listed as an asset of $63,534,-560.00 less allowances for depreciation of $14,143,130.00 leaving the amount of $49,-391,510.00, at the end of 1964.
Gross plant additions for the years 1954-1964 were as follows:
1954 _$2,686,903.00
1955 _ 2,720,661.00
1956 _ 1,676,573.00
1957 _ 3,924,303.00
1958 _ 8,762,707.00
1959 _ 5,037,676.00
1960 _ 4,093,047.00
1961 _ 2,485,809.00
1962 _ 4,350,702.00
1963 _ 4,554,048.00
1964 _ 4,996,017.00
II.
THE NATURE OF THE DUTY OWED TO ITS CUSTOMERS BY A CITY-OWNED WATER UTILITY IN ITS MONOPOLY AREA
Appellant contends that the substantive legal duties owed by a city-owned water utility to its customer within its monopoly area are no different from those owed by a privately-owned utility.
Appellees say that such duties are different; that the same rule of reasonableness does not apply to municipal utility operation as is sometimes applied to private utility corporations; that the extension of water mains by a city-owned utility is discretionary; that there is no common law duty requiring a city-owned utility to extend its mains at its whole cost even if the cost of a particular main could be amortized by anticipated revenues; and that the exercise of valid governmental planning and regulatory powers cannot be infringed by the rule of common law duty.
Several Texas cases support appellant’s contention that the basic legal duties owed to its customers by a city-owned water utility are the same as those owed by a privately-owned utility having a franchise to serve customers in a particular area. City of Texarkana v. Wiggins, 151 Tex. 100 , 246 S.W.2d 622 (1952); City of Galveston v. Kenner, 111 Tex. 484 , 240 S.W. 894 (1922); City of Houston v. Lockwood Inv. Co., 144 S.W. 685 (Tex.Civ.App., El Paso, 1912, wr. dism.) and Town of Highland Park v. Guthrie, 269 S.W. 193 (Tex.Civ.App., Dallas, 1925, wr. ref.) These cases are not mentioned in the majority opinion, although they are the first ones cited in appellant’s brief.
In the case of City of Texarkana v. Wiggins, 151 Tex. 100 , 246 S.W.2d 622 (1952), our Supreme Court held that a city could not discriminate against nonresidents when the sole basis for the differential was that water and sewer service were being furnished beyond the city limits. It appeared in that case that the city had prior to 1948 acquired the American Water Works, a privately-owned utility corporation which had charged the same rate for service to both residents and non-residents. In 1950 the city passed an ordinance raising the rates to non-resident customers so that they would pay 1)4 times the rate for water and double the rate for sewer service applicable to customers within the city limits. The Court held in part as follows:
“The common-law rule that one engaged in rendering a service affected with a public interest or, more strictly, what has come to be known as a utility service, may not discriminate in charges or service as between persons similarly situated is of-such long standing and is so well recognized that it needs no citation of authority to support it. The economic nature of the enterprise which renders this type service is such that the courts have imposed upon it the duty to treat all alike unless there is some reasonable basis for a differentiation. Statutes have been enacted in almost every state making this common-law rule a statutory one. Pond, Public Utilities (4th ed. 1932) sections 270-275. Hence, the American Water Works was required to, and did, *471 render service to respondents at the same rate as was charged within the corporate limits of petitioner.
“It is settled in this state that the petitioner, upon the purchase -by it of the property of the privately-owned utility, was subject to this same rule prohibiting unreasonable or unjustified discrimination in rates and service. City of Galveston v. Kenner, 1922, 111 Tex. 484 , 240 S.W. 894 ; Houston v. Lockwood Investment Co., Tex.Civ.App. 1912, 144 S.W. 685 , writ dis’m; Town of Highland Park v. Guthrie, Tex.Civ.App. 1925, 269 S.W. 193 , writ refused. This same rule prevails in many other states^ 43 Am.Jur. 684; section 172; ( 50 A.L.R. 126 .”,
* * * * *
“ * * * The real reason for the rule that, in so far as treatment of consumers is concerned, the municipally-owned utility is no different from the privately-owned utility is that the economic nature of the business has not changed; it remains a monopoly in spite of the change in ownership.
“The change from private to public ownership may, in theory at least, eliminate or lessen the profit motive, but the consumer of utility services still cannot pick and choose his supplier of water as he does his grocer. The utility consumer is thus at the mercy of the monopoly and, for this reason, utilities, regardless of the character of their ownership, should be and have been, subjected to control under the common-law rule forbidding unreasonable discrimination.”
The dissenting opinion in Wiggins , while disagreeing with the majority on the question of discrimination as to non-resident customers, points out that the City of Tex-arkana owed certain duties to its own inhabitants which it did not owe to non-resident customers. In our case we are concerned only with the duties owed by the City of San Antonio to its water customers located within the city limits, wherein the city-owned water utility exercises a monopoly.
In the case of City of Galveston v. Kenner, 111 Tex. 484 , 240 S.W. 894 (1922) our Supreme Court affirmed judgments of the lower courts awarding a writ of mandamus against the City of Galveston and the members of its board of commissioners compelling them to establish direct separate water service to distinct apartments in a building belonging to Dr. Kenner. A city ordinance which prohibited that type of service was held to be unreasonable and discriminatory. The Supreme Court, speaking through Chief Justice Cureton, held in part as follows:
“Upon the case made in the court below, and thus briefly stated, the trial judge concluded as a matter of law: (1) That the city of Galveston, in undertaking to furnish water to the inhabitants thereof, subjected itself to the same liabilities in its relation to them growing out of the service that a private corporation so engaged would do; (2) that one of these obligations or duties is, upon proper request, to meter the water used by tenants occupying distinct tenements or storehouses (as in the instant case), read the meters, and collect directly from the tenants ; (3) that, in so far as the ordinance to which we have referred undertakes to deny this service to the inhabitants of Galveston, it is unreasonable and void.
“We concur with these conclusions of law, and the Court of Civil Appeals did not err in affirming the judgment of the trial court awarding the mandamus. Our reasons for this conclusion will now be stated.
“In so far as the consumption of water is concerned, it is immaterial, in considering the rights of the consumer, whether the supply be furnished by a municipality or a public service corporation. As a general rule, the obligations to the consumer are the same in either case. It is the duty of the organization supplying the water to supply same im *472 partially to all reasonable within the reach of its pipes and mains. This service must be given without discrimination between persons similarly situated or under circumstances substantially the same. Water must be furnished to all who apply therefor, offer to pay the rates, and abide by such reasonable rules and regulations as may be made a condition for rendering the service. * * * ”
In the case of City of Houston v. Lockwood Inv. Co., 144 S.W. 685 (Tex.Civ.App., El Paso, 1912, wr. dism.) the Court held that certain provisions of an ordinance of the City of Houston concerning the waterworks owned by it were unreasonable and invalid because “They, in effect, provide that unless the inhabitant of the City of Houston demanding water owns property, and if he is merely a tenant, he shall not be entitled to water.” The Court held in part as follows:
“We believe there is no necessity for the citation of any specific authority as establishing the rule that public service corporations in the nature of water companies, gas companies, electric light companies, and others of like kind, being given certain extraordinary privileges and rights, and the nature and conduct of their business having a monopolistic character, are charged by law with the correlative duty of treating all of the public alike, and there is upon them an implied obligation to furnish the commodity in which they deal to each and every citizen or resident who may have need of the commodity which they sell or the service which they give.”
“ * * * The fact that the waterworks in this instance are owned by a municipal corporation does not, in our judgment, change the rule. See Linne v. Bredes, 43 Wash. 540 , 86 Pac. 858 , 6 L.R.A., (N.S.) 707, 117 Am.St.Rep. 1068 .”
In the case of Town of Highland Park v. Guthrie, 269 S.W. 193 (Tex.Civ.App., Dallas, 1925, wr. ref.) the court held invalid certain provisions of a city ordinance which levied a fee of one dollar per lot front foot for water or sewage connection. It there appeared that Highland Park had annexed Mt. Vernon, an adjacent residential district. Shortly before the annexation, the town of Highland Park had acquired a privately-owned Water Company. The water mains of Mt. Vernon were of inferior character, of small dimensions and otherwise unsatisfactory for connection to the Highland Park Water system. Several months after the annexation, Highland Park enacted an ordinance controlling the manner in which its citizens should receive their water supply. One section read in substance as follows:
“ * * * before any premises shall be connected with the same and any consumer furnished water or sewerage service from the water and sewer mains so laid by the town, there shall be collected * * * from the owner and controller of such premises or the person desiring such service, a water or sewer main installation fee at the rate of one Dollar ($1.00) per front foot of the premises to be connected with such water mains and at the rate of one dollar per front foot of the premises to be connected with such sewer main, either or both * * * ”
The Court held in part as follows:
“What is such rule of law when applied to this case in which two citizens of Highland Park, one residing in the old territory of Highland Park and the other in the new territory of Mt. Vernon addition, make application to the proper municipal authorities, each to have his premises, fronting 50 feet on a municipal water main, connected with such main? It is that these two citizens must be dealt with equally and given the same service on equal terms, and that the charge for the service asked must be the same to both. McQuillin Municipal Corporations, vol. 8 (sup.) § 1697; City of Galveston et al. v. Kenner, 111 Tex. 484 , 240 S.W. 894 .
*473 “Can the validity of this ordinance be sustained under this rule? Under the terms of the ordinance the citizen residing in the Mt. Vernon addition is required to pay a fee of $50 for this service that cannot be exacted from the other citizen. This is unjust discrimination, unless there are such special circumstances existing in reference to one of the applicants that would warrant the placing of the applicants in a different class in respect to the charge for such service. Are there such special circumstances in this case?”
* * * * * *
“ * * * When the municipality purchased the waterworks it did so for the benefit of the entire town of Highland Park, and that without reference to when a given territory became, or would become, a part of such municipality. There went with this purchase the duty to supply water impartially to all reasonably within reach of the pipes and mains of the water system, without discrimination between persons similarly situated. When the Mt. Vernon addition was annexed the citizens residing therein became at once entitled to all of the rights and privileges of the other citizens of Highland Park. This rule of law was declared by section 2 of the annexation ordinance, but existed without such declaration. The emergency clause of the annexation ordinance gave as a reason for the immediate passage of such ordinance the fact that the inhabitants of the annexed territory were without fire protection. After the passage of this annexation ordinance, the town of Highland Park, in the performance of its duty to give this fire protection and to furnish to the inhabitants of the annexed territory water service, voluntarily laid a water main through this territory 6,200 feet in length. This improvement in the system, as well as the drilling of an additional well, was paid for out of the proceeds of a bond issue of $125,000. The debt thus created must be paid by all the inhabitants of the municipality, including, of course, those in Mt. Vernon addition. The case presents the condition of a municipality purchasing a waterworks plant through the means of a bond issue, laying additional mains in an annexed territory through the means of another bond issue, and then enacting an ordinance prescribing an installation fee of $1 a front foot before water connection will be allowed with the new main in the annexed territory, and exempting property along the old mains that is not connected from such charge. This is clearly an -unjust discrimination and violative of the rule of common law governing the administration of a municipal owned water system. It is also violative of article 772b of the 1911 Revised Statutes, which is the fundamental law of the municipality, and declares that rates charged for services furnished by municipal water system shall be equal and uniform. It follows that the portion of the above-quoted ordinance which levies a fee of $1 per front foot for water or sewerage connection is invalid, and that this case should be affirmed." (Emphasis supplied)
The holdings in Wiggins and the cases therein cited may be partially summarized as follows: Utility service is affected with a public interest and the economic nature of the enterprise is such that the courts have imposed upon it the duty to treat all alike unless there is some basis for a differentiation. A public utility cannot discriminate in charges or service between persons similarly situated. The economic nature of the business does not change when ownership changes from private to public. A city which acquires a privately owned utility is subject to the same common law rules prohibiting unreasonable or unjustified discrimination in rates and service. It remains a monopoly. A city undertaking to furnish water to its inhabitants subjects itself to the same service liabilities to them that a privately-owned utility would do. As a general rule the obligations to the *474 consumer are the same in either case. It is the duty of the utility, whether privately or publicly owned to supply water impartially to all reasonably within the reach of its mains, without discrimination between persons similarly situated. The rates charged for services shall be equal and uniform.
With reference to Wiggins, Kenner, Lockwood and Guthrie , appellees say in substance that they “have no quarrel with the holdings of these cases that neither municipally-owned or privately-owned water utilities may unreasonably discriminate in connection charges or regulations.” As to Wiggins , appellees say there is no disagreement with the holding, but that here appellant has failed to show discrimination. As to Kenner , appellees say that the question there was one of connection to mains already in place and not one of extension; that again appellant has not shown discrimination. As to Lockwood, appellees say in substance that the holding there was that a municipal utility is subject to the same constitutional mandates as a private utility. As to Guthrie , appellees’ position is somewhat more obscure.
It is true that in Wiggins, Kenner, Lockwood and Guthrie the ultimate decision in each case was on the basis of discrimination. However, I believe that the essential holdings which led to the final determination in those cases have not been seriously disputed or distinguished by ap-pelles. The principles there announced or reiterated concerning the obligations and duties of a city-owned water utility are important and material to the decision of this case. Under these cases and the applicable statutes it appears that the basic duties owed by a city-owned water utility to customers in its monopoly area are the same as those of a privately-owned utility having a franchise which obligates it to serve inhabitants and customers within the city limits.
It appears that some decisions from other jurisdictions hold that when a water works system is owned and operated by a municipality some rules are different from those applied to a privately-owned water utility. Other courts apparently regard a municipally-owned utility as standing in the same position as a privately-owned utility regarding extensions of its services to customers in the area to be served. Here, the discussion of whether a city acts in a proprietary or governmental function in its policy concerning extensions overlaps other questions concerning reasonableness and its proper factors, the exercise of discretion and whether there is an abuse of it. See 56 Am.Jur., Waterworks, Section 61, page 966. I believe that the holdings of our Texas Courts heretofore and hereafter cited are in accord with the view last stated in 56 Am.Jur., Waterworks, Section 61 that a municipal corporation engaged in furnishing water to its inhabitants stands in the same position regarding extension of services as a privately-owned water utility.
THE STATUTES
The statutory provisions, most prominently involved herein have been codified as Article 1109a, V.A.C.S., the City of San Antonio having purchased its water works shortly after its enactment. However, Section 7 of that statute provides in part that it is cumulative of other legislative acts applicable to cities and towns, including home rule cities, operating under Title 28 of the Revised Civil Statutes of 1925. The parties, particularly appellees, have placed reliance in certain respects on such other statutes. Appellant places primary reliance upon Articles 1109a and 1110c, V.A.C.S. Appellees rely primarily upon Articles 1175, 1108, 1109a, 1111, 1113, 1113a, 1115, 1116, 1118, 1118a and 974a, V.A.C.S.
Appellant contends that specific statutory authorization is a prerequisite to transferring the cost burden of extending facilities to the consumer; that there is no such authority in the statutes which would authorize the challenged portions of the regulations; and that the statutes imply the negation of such power. Appellant’s above- *475 stated contentions are based primarily upon its construction of Articles 1109a and 1110c, V.A.C.S. Appellant points out that nowhere in Article 1109a, V.A.C.S. or in other statutes is it even hinted that the Legislature contemplated anyone besides the system operator itself making required extensions ; that the lawmakers went to great pains to secure a sufficient portion of the systems’ income from other liabilities so that it might be freed for expanding the system; that the statutory provisions authorize various forms of debt financing for extending the system, i.e., bonds, notes and warrants; that adequate financial resources are thus provided; and appellant says that appellees here cannot under applicable statutes, properly rest their claimed inability to defray water main extension cost upon inadequate revenue alone; that, under Article 1109a, appellees have a statutory obligation to make “all * * * extensions necessary to render efficient service.”
Appellant’s amicus curiae takes the position that express statutory language imposes a duty on the city-owned utility to finance reasonable water service extensions. It says that article 1109a, and section 2 thereof, shows that the legislature intended for rates to be sufficient for financing the costs of such extensions, and expressly provided various methods for such financing as follows: (1) Article 1109a, which allows issuance of bonds and notes to finance water system extension, (2) Article 1109a-2 which allows issuance of warrants (without voter approval) to finance water system extensions, (3) Article 1175, which allows cities to allocate revenues from sale of water to finance water system extensions, (4) Article 1109, which allows cities to exercise the right of eminent domain in acquiring water system extensions, and (5) Lastly, that cities have available to them the borrowing power of developers under refund contracts.
Appellant further contends that Article 1110c, V.A.C.S., known as the “Grand Prairie” bill, enacted in 1963, and amended in 1967, reflects the state of the law prior to its passage to be that express statutory authority was required for water main assessments, that cities did not theretofore have that power; that extension costs were to be absorbed by the entire system and not just benefitted properties; that cities in furnishing water service act in a proprietary capacity.
Sections 19 and 19-A of Art. 1110c, V.A.C.S. as originally enacted provide as follows:
“Sec. 19. No assessment or other charge permitted by this Act shall be made for the construction of improvements to any water or sewer system against any property or the owners thereof unless such property is in an area which has been subdivided or platted for a period of at least ten years next preceding the effective date of this Act. For purposes of determining property of areas to which this Act shall apply, ‘Subdivided or platted property’ shall mean such property as has been duly platted under the terms of Article 974 — A, V.A.T.C.S. or any property which has been subdivided or platted by map or plat filed for record in the office of any county clerk, by the terms of which map or plat there has been made any dedication of the property to the public use for a street or alley right-of-way or for public utility easements.
“Sec. 19-A. It is the intention of the Legislature, due to the emergency nature of this Act, that nothing contained herein shall be construed to effect any change in any way in the law of this state, whether promulgated by Statute or court decision, either or both, relating to the duty of a city in its proprietary capacity to furnish water and sewer service, either or both.”
When originally enacted in 1963, Art. 1110c was applicable to a city located in a county having more than 700,000 population. As amended in 1967 the county population requirement has been reduced to *476 100,000. Section 19 as amended in 1967 now reads as follows:
“Sec. 19. No assessment or other charge for the construction of improvements to any water or sewer system shall be made against any property or property owners, regardless of who initiates the request for said construction, unless such property is in an area which has been subdivided or platted for a period of at least ten years next preceding the effective date of this Act. For purposes of determining property or areas to which this Act shall apply, ‘subdivided or platted property’ shall mean such property as has been duly platted under the terms of Article 974-a, V.A.T.C.S. or any property which has been subdivided or platted by map or plat filed for record in the office of any county clerk, by the terms of which map or plat there has been made any dedication of the property to the public use for a street or alley right-of-way for public utility easements.”
Appellees argue that under Section 2 of Article 1109a the Board is required only to charge and collect “a sufficient rate to pay for ‘all operating, maintenance, depreciation, replacement, betterment and interest charges,’ and principal. A requirement to charge a sufficient rate for extensions is nowhere to be found in the statutes.” I do not agree with this position. Analysis of the statute and consideration of case law on the subject refutes appellees’ contention. In the case of City of Houston v. Allred, 123 Tex. 334 , 71 S.W.2d 251 (1934) our Supreme Court refused a writ of mandamus sought by the City of Houston to compel the Attorney General to approve the transcript concerning issuance of $2,502,000.00 of water works bonds issued pursuant to an ordinance enacted November 3, 1933. The mandamus was refused based upon objections by the Attorney General and certain bondholders who were owners of bonds issued in 1926 under the provisions of Article 1109a, as it then existed. The decision was after the 1933 amendments to Article 1109a. It should be noted that the 1939 amendment to said statute made changes which authorized issuance of additional revenue bonds on a subordinate basis, and the 1953 amendment authorized additional bonds on either a subordinate or a party basis. In deciding the case, the Supreme Court construed Article 1109a, V.A.C.S. as follows:
“The first subdivision of article 1109a as it existed when the 1926 bonds were issued expressly authorized cities of more than 160,000 inhabitants to mortgage and incumber their water systems and the income thereof. It also authorized such cities to mortgage and incumber the additions, extensions, enlargements, additional water powers, and riparian rights of such systems, and the income therefrom, either separately or with such systems. After making provision for the incumbrances above mentioned, article 1109a, in subdivision 2 thereof, expressly provided that, when the income of the water system was incumbered, the expense of operation and maintenance should be a first lien and charge against such income. This section then made provision for charging rates sufficient to pay operating expenses and the interest and principal of the obligation secured by the plant income. The statute carefully defines what was meant by operating expenses and maintenance, including therein ’all salaries, labor, materials, interest, repairs, and extensions, necessary to render efficient service,’ etc. The statute then carefully required that the city shall charge and collect ‘a sufficient rate to pay for all operating, 'maintenance, depreciation, replacement, betterment and interest charges, and for interest and sinking fund,’ etc. * * 71 S.W.2d 258 . (Emphasis supplied)
Under City of Houston v. Allred it is clear that operating expenses and maintenance include, among other things “extensions”. Furthermore, Section 2 of Article 1109a provides not only that there shall *477 be charged and collected for such services a sufficient rate to pay all operating and maintenance expenses but also for an interest and sinking fund for the bonds mentioned in Section 1 of that statute. Since the decision in City of Houston v. Allred, supra, Article 1109a has been amended on two occasions (1939 and 1953). However, the first paragraph of Section 2 thereof has remained in substantially the same wording since its original enactment in 1925. The changes which have been made in it either by addition or deletion are not material to the question now under consideration.
The 1939 amendments made by the 46th Legislature (Ch. 6, pp. 99-102) to the 1925 Act (Ch. 33, 39th Leg.) as amended by the 43rd Legislature (Ch. 36, first called Session 1933), codified as Art. 1109a, V.A. C.S., show the legislative intent to provide additional and adequate financing arrangements so that cities might make extensions, etc. by issuing bonds and warrants. Section 5 of the 1939 Act provides as follows:
“Sec. 5. The fact that the Water Department improvements, extensions, repairs and additions are urgently needed by the cities which come within the scope of this Act and that the health of the inhabitants of such cities is endangered by reason of the lack of such improvements, and the lack of said improvements has created a serious fire hazard and the fact that the Statutes hereby amended have resulted in unreasonable hardship upon said cities in that the areas of said cities are rapidly expanding and the population of said cities has greatly increased and said cities are unable to finance the necessary and essential improvements, extensions, repairs and additions to their water system, and sewer systems and sewage disposal plants and systems, because of the fact that the Statutes hereby amended prevent the issuance of additional water revenue bonds and warrants until all such outstanding revenue bonds and warrants are finally paid in full and many of these outstanding bonds and warrants will not mature until the expiration of many years from this date, create an emergency and an imperative public necessity requiring that the Constitutional Rule requiring all bills to be read on three separate days, be suspended, and it is hereby suspended, and that this Act be in full force and effect from and after its passage, and it is so enacted.”
I agree with appellant’s contention that there is no express statutory authority for imposing capital costs of extensions on customers, except under Art. 1110c, V.A. C.S., which applies only to areas which have been subdivided or platted for at least ten years prior to its enactment, and to cities or towns located in counties above the stated population figure. That fact situation is not here involved. The applicable Statutes authorize the city-owned utility to use various adequate methods for financing the costs of extensions and other capital expenditures, and generally contemplate that such capital costs are to be provided by the city-owned utility, not someone else. The Statutes expressly recognize that expenses must be incurred for operating and maintenance of the system as well as for servicing of bonds. Capital expenditures for extensions are recognized as a part of maintenance and operation and may be made so as to constitute a first lien and charge; and expenditures for extensions may also be made out of the proceeds of bond issues. The Statutes further recognize and require that a sufficient rate shall be charged to pay for all such expenditures, for maintenance and operation and for an interest and sinking fund for bonds.
III.
THE REASONABLENESS IN FACT OF A REQUEST FOR EXTENSION. THE FACTORS OF REASONABLENESS. THE REFUSAL OF THE REGULATIONS TO RECOGNIZE REASONABLE EXTENSIONS.
The question of the reasonableness in fact of a request for an extension of water mains will now be discussed.
*478 We have not been cited to any Texas case which is squarely in point relating to the duty of a municipal water utility to make reasonable extensions of its water mains or concerning the rights of customers or potential customers to require such extensions within the area to be served by said utility. The cases from other jurisdictions throw considerable light on the subject, and I will discuss those which I find to be persuasive.
In 56 Am.Jur., Waterworks, Sections 60 and 62, pages 964 and 967, the general rules applicable to a privately-owned water utility relating to extension of service and the reasonableness of demand for extension are discussed.
Many of the text statements made in the above-cited sections of American Jurisprudence are supported by the leading case of Lukrawka v. Spring Valley Water Company, 169 Cal. 318 , 146 P. 640 (Sup.Ct. California 1915). There certain residents of the City of San Francisco filed suit for mandamus against a privately-owned water utility to compel it to extend its water mains and to provide them with water. The lower courts denied the relief sought and rendered judgment for the water company. The Supreme Court of California reversed the lower courts and granted the mandamus. The primary holding was that by accepting the franchise the water company had also assumed the obligation “to anticipate the natural growth of the municipality it had undertaken to serve as a whole; and to take reasonable measures to have under its control a sufficient supply of water to meet the reasonable demands for water by the growing community.” In reaching its decision the court had much to say concerning the right of a customer to require a reasonable extension of water mains and the duties of the company in connection therewith. The record there reflected that some of the plaintiffs, (proposed new customers) could be supplied with water if the water company extended its mains by lateral connections for a distance of 50 feet along certain avenues on which those plaintiffs resided, and that in order to supply all of the plaintiffs, the water company would be required to install lateral connections with the Geary Street main extending some 2,000 feet southerly along the avenues upon which the greater number of the plaintiffs resided. The Court held in part as follows:
“We are of the opinion, therefore, for the reasons given and under the authorities we have referred to, that when the respondent accepted the franchise offered by the state, and undertook to supply the municipality of San Francisco and its inhabitants with water, it assumed a public duty to be discharged for the public benefit; a community service commensurate with the offer of the franchise which involved the duty of providing a service system which would be reasonably adequate to meet the wants of the municipality, not only at the time it began its service, but likewise to keep pace with the growth óf the municipality, and to gradually extend its system as the reasonable wants of the growing community might require, and, as it appears from the petition in this case that respondent is in a position to discharge this duty towards petitioners by a reasonable extension of its mains, it should have done so on their demand, and, having refused, may be compelled to do it.”
“In reaching this conclusion it is, of course, to be borne in mind that the right of an inhabitant of the municipality or the inhabitants of a particular portion of it to compel the service to them by the water company through the extension of its system is not an absolute and unqualified right. The fact that the water company has undertaken to serve the entire municipality, and that it would be of advantage to an inhabitant thereof, or a number of them, to have the water system extended to supply them, would not of itself be sufficient to require or compel the company to make the extension. The duty which the water company has un *479 dertaken is of a public nature and to meet a public necessity for the supplying of water to the community. The obligation of the company is not to supply each or any number of inhabitants of the municipality on demand as an absolute right on their part, but it has only assumed and become charged with the public duty of furnishing it where there is' a reasonable demand for it and a reasonable extension of the service can be made to meet the demand. The right to require the service and the duty of furnishing it by an extension of the water system is to be determined from a consideration of the reasonableness of the demand therefor. It would hardly be claimed that the obligation of a water company exercising a public service franchise would require it on the demand of an inhabitant of the city, or even a number of them, residing at a long distance from a point in the city to which its mains are already extended, to further excavate the streets of the municipality at its own expense and extend its mains to them, where the rates to be charged for the water to be delivered would but to a slight extent compensate the company for the expenditures entailed in doing" so; in fact, without any certainty that there would be a continuous consumption of water or a continuous payment of rates even after it was brought to them. On the other hand, where the extension of an existing main, if made only for a few feet, would supply the water service, the demand for making such an extension would obviously be a reasonable one, as the rates to be charged would ordinarily compensate for the expenditure made by the company. Between these particular cases suggested there is a wide field for the play of the rule of reasonableness of demand for service, and whether it does or does not exist must be determined by a court as a fact in each particular case where it is sought to compel an extension of service. Of course, the matter of expenditure to be entailed by the public service company in extending its service is not a controlling feature in determining the reasonableness of a demand for it, because the water rates established as a whole between the public service corporation and the city by the public body to which that duty is committed must be sufficient to yield a fair, just, and reasonable income on the property of the company devoted to public use, which would include such necessary expenditures. But additional expenditure by the company or an additional burden on the water rate payers as a whole should not be imposed for the benefit of a particular portion of the community unless a reasonable necessity for it exists. Whether it does or not is to be determined by a consideration of the facts in each particular case, and, among other things, by a consideration of the duties of the company, the rights of its stockholders, the supply of water which the company may control for distribution, the facilities for making extensions to a locality beyond its present point of service, the rights of existing customers, the wants and necessities of the locality demanding it, and how far the right of the community as a whole may be affected by the demanded extension. We refer to this matter of reasonableness of demand to be considered in determining the right to require the extension of service on account of the general language used in the authorities cited in sustaining the implied obligation of a public service corporation under its charter to supply all the inhabitants of a municipality with, water. While this is the obligation it undertakes, the right of the inhabitants of the municipality to have it discharged is, as we have said, not an absolute, but a relative, one, which may be enforced only when conditions are such that there exists a reasonable demand for the fulfillment of the obligation. In the case at bar the facts charged in the petition show that there is such a reasonable demand for such an extension, and, as there is a liability on *480 the respondent under such circumstances to comply with it, it may be compelled to do so.” (Emphasis supplied)
Appellant relies on several decisions of the courts of New Jersey involving a developer by the name of Reid and a town named Parsippany-Troy Hills Township. These cases are Reid Development Corp. v. Parsippany-Troy Hills Township, 10 N.J. 229 , 89 A.2d 667 (1952) ; Reid Development Corp. v. Parsippany-Troy Hills Township, 31 N.J.Super. 459 , 107 A.2d 20 (1954); Lake Intervale Homes v. Parsippany-Troy Hills Township, 28 N.J. 423 , 147 A.2d 28 (1958). These decisions involve the issue of reasonableness as well as other questions.
In the first Reid case there was an action in lieu of mandamus to compel the township to extend its water mains a distance of 600 feet to Reid’s subdivision. The governing body of the township advised Reid that he would have to pay the full cost of extension unless he increased the front footage of his lots to 100 feet. Reid refused to do so. The lower court denied Reid the relief sought, but the Supreme Court reversed and remanded, holding that wholly extraneous considerations had governed the exercise of discretionary authority. In deciding the case the court discussed some of the basic principles involving the ownership and operation of a municipal water utility. It appears that the New Jersey cases recognize the basic proprietary function which is involved, but also that in some respects a governmental discretion as to extension of water mains may be properly exercised. In the first Reid case the court held there was an abuse of authority and discretion and that Reid had a right to the requested extension. The court discussed some of the factors of reasonableness such as the need for the extension, its cost and the return to be expected from it. The court pointed out that it had theretofore been the practice of the Township to provide extensions of its mains under a revenue-refund agreement with the developer. It also appeared that after entry of the judgment in the lower court, the governing body of the township had adopted an ordinance under which the “old terms” were no longer permissible, and required the developer to pay the entire cost of the extensions and to dedicate the title thereto to the township. The new ordinance also provided that an “individual” should pay for his own extension; and that the granting of extensions “shall rest solely within the discretion” of the governing body and the township shall not be under the duty of reimbursement “for all or any part of the cost thereof” but the township may construct such extensions “as a general township obligation in such streets, avenues or roads where if in its discretion, it deems the public interest will be served by the making of such extensions.” This ordinance was held void for want of a norm or standard governing the exercise of the discretionary authority. The court held in part as follows:
“ * * * The provision of water for the public and private uses of the municipality and its inhabitants is the exclusive province of the local agency; and it is elementary that the exercise of the power must be in all respects fair and reasonable and free from oppression. There can be no invidious discrimination in the extension of the service thus undertaken by the municipality as a public responsibility. Equal justice is of the very essence of the power. Impartial administration is the controlling principle. The rule of action must apply equally to all persons similarly circumstanced. There is a denial of the equal protection of the laws unless the water service be available to all in like circumstances upon the same terms and conditions, although the rule of equality may have a pragmatic application. Persons situated alike shall be treated alike. Washington National Insurance Co. v. Board of Review, 1 N.J. 545 , 64 A.2d 443 (1949); Librizzi v. Plunkett, 126 N.J.L. 17 , 16 A.2d 280 (Sup.Ct.1940); Millville Improvement Co. v. Millville Water Co., 92 N.J.Eq. 480, 113 A. 516 (Ch.1921); Yick Wo v. Hop *481 kins, 118 U.S. 356 , 6 S.Ct. 1064 , 30 L.Ed. 220 (1886); People v. Kuc, 272 N.Y. 72 , 4 N.E.2d 939 , 107 A.L.R. 1272 (Ct.App.1936).
“There are cases holding that the establishment of a water system and its operation for protection against fire and other dangers to the public health and safety constitute a governmental function comprehended in the police power of the municipality. City of Chicago v. Ames, 365 Ill. 529 , 7 N.E.2d 294 , 109 A.L.R. 1509 (Sup.Ct.1937); Canavan v. City of Mechanicville, 229 N.Y. 473 , 128 N.E. 882 , 13 A.L.R. 1123 (Ct.App.1920). But there is general agreement that the distribution of water by a municipality to its inhabitants for domestic and commercial unes is a private or proprietary function which in its exercise is subject to the rules applicable to private corporations. This is the rule in New Jersey. Lehigh Valley R. R. Co. v. Jersey City, 103 N.J.L. 574 , 138 A. 467 (Sup.Ct.1927), affirmed 104 N.J.L. 437 , 140 A. 930 (E. & A. 1928) ; Fay v. Trenton, 126 N.J.L. 52 , 18 A.2d 66 (E. & A. 1941). See, also, Olesiewicz v. City of Camden, 100 N.J.L. 336 , 126 A. 317 (E. & A. 1924).
“A public water company is under a duty as a public utility to supply water to all inhabitants of the community who apply for the service and tender the usual rates. The obligation includes the establishment of a distributive plant adequate to serve the needs of the municipality and the enlargement of the system to meet the reasonable demands of the growing community. The utility is under a duty to serve all within the area who comply with fair and just rules and regulations applicable to all alike. The obligation is enforceable by mandamus. Bordentown v. Anderson, 81 N.J.L. 434 , 79 A. 281 (E. & A. 1911); Woodruff v. [City of] East Orange, 71 N.J.Eq. 419, 64 A. 466 (Ch.1906); Millville Improvement Co. v. Millville Water Co., cited supra. While it has been held that a municipality so engaged exercises a governmental discretion as to the extension of the water mains, governed largely by the extent of the need and economic considerations, the discretionary authority must be fairly and reasonably used; and the remedial process of mandamus may be invoked for an abuse of discretion if the extension be arbitrarily refused. Lawrence v. Richards, 111 Me. 92 , 88 A. 92 , 47 L.R.A., N.S., 654 (Sup.Jud.Ct.1913); City of Greenwood v. Provine, 143 Miss. 42 , 108 So. 284 , 45 A.L.R. 824 (Sup.Ct.1926); Lukrawka v. Spring Valley Water Co., 169 Cal. 318 , 146 P. 640 (Sup.Ct.1915). See, also, 47 L.R.A.,N.S., 656; 56 Am. Jur. 964 , et seq. It would seem that no sound distinction can be made, in respect of the extension of the service, between a municipality which has undertaken to provide water to the community and a water company performing the function of a public utility. In City of Chicago v. Northwestern Mut. Life Ins. Co., 218 Ill. 40 , 75 N.E. 803, 804 , L.R.A..N.S., 770 (Sup.Ct.1905), it was held that when a municipal corporation not obliged to furnish water to its inhabitants undertakes to do so, it proceeds ‘not by virtue of the exercise of the power of sovereignty,’ but rather engages in ‘a busness which is public in its nature, and belongs to that class of occupations or enterprises upon which public interest is impressed’, and is under a duty to act reasonably and not arbitrarily in the fulfillment of that function and to ‘serve all who may apply on equal terms.’ ” (emphasis supplied)
In the second Reid case ( 31 N.J.Super. 459 , 107 A.2d 20 ) an extension was requested into the same general area involved in the first case ( 10 N.J. 229 , 89 A.2d 667 ). By then the Township had enacted another ordinance requiring that developers pay the entire cost of water main extensions. Reid sued to compel the Township to make the extension without his complying with the ordinance and to set aside the ordinance as invalid. The intermediate New Jersey Appellate Court affirmed the judgment of the lower court denying the particular *482 extension. The court pointed out that the prior 600 foot extension which had been made after the first Reid case did not have a single customer and no revenue had been realized from it. The court also discussed various factors relating to the reasonableness of a requested extension of water mains and held that an abuse of discretion was not established in the light of factors of need and economic considerations. But the court held that the ordinance was invalid because there was no statutory authority for imposition of the costs of new mains on the developer. The second Reid case holds in substance that even where governmental discretion is involved, that requests for water main extensions must be determined on their merits and tested by the reasonableness thereof; that if a request for extension is not reasonable in fact, the municipally-owned utility may decline to pay the costs of making it; but in the absence of statutory authority such costs may not be imposed on the developer.
In the third case where Reid was involved ( 28 N.J. 423 , 147 A.2d 28 ) it appeared that he had acquired the interest of Lake Inter-vale Homes, a corporation, in certain lots scattered throughout the subdivision. Reid demanded water extensions from the Township which was refused. By then a State Planning Act of 1953 and a new Township ordinance had been passed pursuant thereto. The ordinance imposed extension costs on the developer without provision for refund. Reid and the Township agreed that he would install the mains initially at his expense without prejudice to his rights and could sue for refund. The lower court allowed Reid to recover $6,000.00 representing a portion of his costs for the extensions made, that amount being the limit of liability of the Township under the agreement. The Township appealed, and the Supreme Court of New Jersey affirmed the judgment, holding that the ordinance there involved was arbitrary and discriminatory. The court held in part as follows:
“The municipality, as we have previously stated, has adopted no standards or regulations to which applicants for service of the kind in question may turn for guidance as to the manner in which the discretion will be exercised. This omission may be contrasted with the statute regulating the duty of private utilities in this regard and with the regulations of the Board of Public Utility Commissioners adopted thereunder with respect to the cost of extensions of mains when requested by developers. Board of Fire Commissioners of Fire District No. 3, Piscataway Tp. v. Elizabethtown Water Co., 27 N.J. 192 , 142 A.2d 85 (1958). Under the pertinent rule of the Board, a developer who is ordered to make a deposit to cover the original cost may recoup the entire sum over a prescribed period of time if the revenue produced from the new consumers meets certain requirements. Board of Public Utility Commissioners, Tentative Draft of Regulations for Electric, Gas, Water and Sewer Utilities, Reg. 408.1 p. 39 (October 11, 1958).
“It does not seem amiss to suggest that even where a municipality operating its own water system does not have a subdivision regulation ordinance (which clearly requires standards to be set forth) that promulgation of general standards to regulate the matter of extensions would greatly facilitate the task of judicial appraisal of the exercise of the governmental discretion.”
The New Jersey cases support appellant’s contentions and to me are highly persuasive. Although under New Jersey law there is a governmental discretion in some respects, these cases emphasize the basic proprietary function involved in the furnishing of water service to customers by a municipally-owned water utility. They hold that the test of reasonableness is applicable in such case and is an essential factor in the exercise of discretion by the municipally-owned utility in passing upon requests for extensions; and that the rules applicable to private utility corporations furnishing utility service are applicable to distribution of water by a *483 municipally-owned utility. These cases also recognize the existence and propriety of the refund-revenue arrangement in a situation where a developer makes the initial capital outlay for water mains and is given opportunity to recover such expenditure out of revenues received by the utility from the extension made.
I am unwilling to hold that a city-owned water utility exercising a monopoly within its city limits has a lesser obligation under Texas law than a privately-owned utility with a franchise (which cannot be exclusive) which obligates it to furnish water service to customers in the area.
FACTORS OF REASONABLENESS
The factors of reasonableness will now be discussed. In 43 Am.Jur., Public Utilities and Services, Section 48, pages 602-603, there appears a compilation of factors bearing on the reasonableness of a demand for extension, as follows:
“§ 48 Reasonableness of Demand for Extension. — The right of an inhabitant or group of inhabitants of a community or territory served by a public service company to demand an extension of service for their benefit is not absolute and unqualified, but is to be determined by the reasonableness of the demand therefor under the circumstances involved. The duty of a public service company to extend its service facilities, and the reasonableness of a demand for such extension, depend in general, upon the need and cost of such extension, and the return in revenue which may be expected as a result of the extension; the financial condition of the utility; the advantages to the public from such an extension; and the franchise or charter obligation to make such extension. In this last respect, a water company may be compelled to extend its mains so as to supply all the inhabitants of the municipality by which it is franchised, if its charter requires it so to do. Furthermore, although a franchise ordinance provides that a water company need not extend its water mains along any ungraded street or alley, still, if the company has voluntarily extended its main along such a street, it cannot refuse to supply a customer thereon, on the theory that it was not corn-pelled to build along that street in the first place.
“In regard to the reasonableness of the cost which an extension will entail, it is not necessary that a particular extension of service shall be immediately profitable, or that there shall be no unprofitable extensions, the criterion being generally whether the proposed extension will place an unreasonable burden upon the utility as a whole, or upon its existing consumers. As to the costs involved in making an extension, various elements, such as the type or quality of construction to be used and the use of any existing equipment or facilities, enter into the determination of this matter. But while the utility cannot fix the limits of the proposed extension at territory which will yield an immediate profit, and, on the other hand, cannot be required to make unreasonable extensions, there is a point midway between these extremes at which the utility may require of the proposed consumer assistance in the necessary outlay in furnishing the service. In this respect, various methods have been adopted, depending upon the circumstances of the particular cases, in determining the amount of contribution or assistance which may be required. It has been held, however, that the utility cannot compel prospective customers to purchase stock as a condition precedent to extending its service.
“In a number of cases which have arisen under war conditions there has been a departure from the rule that requires the utility to make reasonable extensions at its own expense. However, the abnormal conditions presented by a war, as well as the scarcity of labor and the difficulty in securing capital, do not alone constitute a sufficient ground for determining a *484 proposed extension to be unreasonable; they should be given due consideration in compelling any particular extension to be made, and where the extension needed is a reasonable one, and the amount of capital is not large, an order requiring the extension will be issued accordingly.”
Appellees, after extended argument concerning the alleged governmental powers and discretion of the Board, ultimately recognize that the test of reasonableness is applicable to the actions and regulations of the Board concerning extensions. At page 65 of their original brief, appellees refer to the above-mentioned statement in American Jurisprudence. Appellees then argue that the regulations in question were adopted by the Board only after study and consideration of the factors of reasonableness; and that the provisions which impose the cost of “on-site” mains on developers and new customers without compensation or promise of reimbursement meet the test of reasonableness when its proper factors are considered. Appellees say that there are seven such factors of reasonableness mentioned in the said text statement as follows: (1) The need and cost of the extension. (2) The return in revenue which may be expected as a result of the extension. (3) The financial condition of the utility. (4) The advantages to the public from such an extension. (5) The franchise or charter obligation to make the extension. (6) Whether the proposed extension will place an unreasonable burden on the utility as a whole. (7) Whether the proposed extension will place an unreasonable burden upon the utility’s existing customers.
I believe that factors numbers 6 and 7, above-listed, are actually discussed in the text statement in connection with the factor of cost (item number 1); however, I will discuss all seven of such factors in the light of appellees’ contentions. The above quoted text statement does not specifically mention the element of growth of the municipality in terms of increased population or number of customers, as is discussed in the text statements heretofore set out or in the California case of Lukrawka , or in the New Jersey cases. However, I believe that such element of growth is closely related to most, if not all, of the factors mentioned, and it will be later discussed in considering them.
At page 78 of appellees’ original brief, their position concerning reasonableness is stated as follows:
“It is submitted that under any standard of proof that the record in this appeal shows the Board’s Regulations and order (reaffirming the Regulations) to be reasonable and thus lawful based upon the cost of extension, the anticipated revr enues from the extension, the financial condition of the system, the advantages to the public, the financial burden that the requested extension would place on the system and the discrimination against existing customers that would result from the proposed extension request.”
In may view, appellees’ position is not well taken for the reasons now to be stated.
With reference to the factor of need, the regulations recognize that there is a need for an “on-site” main in order that a new customer may receive water service to his home or business. Aside from installation of a meter and the service line connection (for which separate charges are made), the “on-site” main is the last important link in the distribution of water to the customer’s property. Without it, there can be no actual furnishing of water by the utility to the customer. The question presented here does not involve the issue of actual need for an “on-site” main, but instead relates to who will pay for it. With reference to the factor of cost, the record reflects that for 7902 lots in new subdivisions of San Antonio to which extensions were made from February 24, 1960 to the end of 1964, a period of almost five years, the average cost for “on-site” mains was $203.00 per lot. For the 39 lots in Crown-hill Unit #8, the estimated cost for “on-site” mains was $228.00 per lot. There is *485 no factor of unusual cost here involved. Unusual distances are not involved. Ap-pellees have laid transmission lines into every area and section of the City of San Antonio, its monopoly area, as well as some outside of its corporate limits. The remaining distribution lines necessary for furnishing water to a customer’s property are the “approach” main and “on-site” main. Appellees still recognize and have in effect a refund-revenue arrangement for installation of “approach” mains. The developer or new customer furnishes the initial capital outlay for an “approach” main and is reimbursed for same on the basis of the formula provided in the regulations. The question again is not as to actual cost or any unusual or unreasonable cost of an extension, but again relates to who will pay for it. It is not contended here that the advantages to the public from extensions to new customers depend on who pays for “on-site” mains, the city-owned water utility or the developer or new customer. With reference to the factor of revenue which may be expected as the result of new extensions, appellees’ testimony shows that the average system wide gross revenue per customer under existing rates is $50.50 annually, which includes revenue from the extensions made to 7902 lots in new subdivisions during the above-mentioned period 1960-1964 and from other units of Crown-hill’s subdivision. Some evidence indicates that revenues from Crownhill’s other units were higher than the average. There is nothing to show that the revenue to be expected from extensions to the Crownhill lots in question would be any less than the average of $50.50 annually per customer, as above-mentioned.
Ultimately, appellees’ position as to the factors of reasonableness is based upon their contentions concerning the effects of inflation. Appellees argue that the dollars and cents cost of making extensions to new customers is higher than it was for old customers; that if the Board bears the whole cost of extensions, including “on-site” mains, to new customers, the investment required can never be amortized at existing rates; that payment by the Board of the cost of “on-site” mains would place an unreasonable burden upon the utility as a whole and upon existing customers; that the financial condition of the utility will not permit it to pay the presently inflated costs of all extensions, particularly that of “on-site” mains and also to make the other expenditures for the program which the Board has adopted. For these reasons ap-pellees say that the Board can by regulation deliberately shift part of the capital costs (“on-site” mains) to new customers and developers without promise of reimbursement and hope of compensation.
Appellees’ argument concerning the presently higher costs of making extensions to new customers as a justification for imposing capital costs on them is a very narrow application of the reality of inflation. We judicially know that inflation has been with us for a long period of time. However, inflation is reflected not only in the increased costs of water utility operations but in most, if not all, of the economic phases of daily living. The cost of goods and services along with wages and income all tend to rise, although the relationship between income and expenses in a given case may not always be the same during economic cycles. Even if it be assumed that the city-owned utility is dealing with the same number of water customers and new extensions are not required, the problem caused by the inflated cost of maintenance, repair and replacements would still be present, and the utility would have to manage and control its business so as to pay such costs. The law provides adequate methods to the city-owned water utility for discharging its obligations in such respect.
I do not believe that appellees’ argument concerning inflation places an unreasonable burden on old customers or establishes discrimination against them. On the other hand, it appears that the 1960 regulations in effect cause discrimination against new customers, including developers. The record reflects that the net revenue to be ex *486 pected from a new customer, (based upon experience for a period of almost five years of operation under the regulations) is more than sufficient to amortize the capital investment for “back-up” facilities and that net revenues from new customers will produce an additional amount which will be available for other purposes, such as maintenance and servicing of bond issues. New customers, therefore, are thus required to pay for expenditures made for the benefit of existing customers, including “on-site” mains, installed before the regulations in question. Under them, the existing customer is not required to pay for the new customer’s “on-site” main, but the new customer, at least in part, is required to bear the expense of the existing customer’s “on-site” main and the other improvements made from bond issues. The record also reflects that once an extension of water mains is made to a customer, the Board assumes the maintenance, repair and replacement of same. At the end of their useful life the mains (including an “on-site” main) are replaced at the cost of the Board. It is apparent that an old customer, who did not pay separately for his “on-site” main, receives a replacement for same at the currently inflated cost. The replacement “on-site” main for the old customer may today cost much more than the original one. But the new customer, by paying the same rate as old ones, bears his part of giving the old customer a new replacement “on-site” main at the same cost, for an average lot, as a new one for the new customer. It is further apparent that the inflated cost of maintenance, repair, plant and distribution systems are borne by the new customers along with the old ones. The record further shows that some, apparently a substantial part, of the expenses for general extensions made by the Board are for serving customers outside of the city limits of San Antonio.
Appellees, as above stated, say that if the Board is required to bear the whole cost of extensions to new customers, the capital investment can never be amortized. But this is so because there is not sufficient net revenue at the current rate for the expenses of the program which the Board has adopted and at the same time to pay for extensions of “on-site” mains which are reasonable in fact. Resolution of the problem of meeting its legal obligations is a matter of policy for determination of the agents of the City and its water utility within the limitations provided by law.
The evidence .shows that the financial condition of the city-owned water system is good. The 1964 annual report of the Board (a portion of which is set out in Appendix B hereto) particularly reflects such condition. The conditions which brought about the so-called financial crisis of 1956 have been remedied. There is no satisfactory showing by appellees that if the Board is required to make and pay for reasonable water-main extensions that an unreasonable burden would be placed either on the utility as a whole or upon existing customers.
The higher costs of water-utility operations caused by inflation is not the fault of new customers, old customers or the city-owned utility. They all may properly be called victims of inflation. The problems caused by the effects of inflation are usual ones for most, if not all, individuals and business organizations. As the prices of goods and services rise and the purchasing power of the dollar becomes less, necessary adjustments must be made to meet the situation. One such usual adjustment is to increase income so that funds will be available to meet the increased costs caused by inflation. Another adjustment may be to do without certain items and thereby avoid expense.
In the instant case the city-owned water utility has adjusted to the reality of inflation by adopting a policy which in effect determines that only developers and new customers must bear the brunt of inflation as to “on-site” mains and that neither ap-pellees or old customers will bear their share of the burden caused by economic conditions. The city-owned water utility *487 has because of inflation thus adopted a policy of shifting capital costs of “on-site” mains to developers and new customers, instead of using the adequate and available means provided by law to pay for same.
In my view, the business of a city-owned water utility must be conducted by its agents so as to deal with the reality of inflation in a manner which is consistent with the legal duties which it owes to customers in its monopoly area. Where a requested extension of water mains is reasonable in fact, the city-owned water utility has a legal duty to discharge to its customers, whether they are developers or new customers or old ones, and cannot avoid such duty by refusing to use the methods provided by law to accomplish such purpose.
THE REFUSAL OF THE REGULATIONS TO RECOGNIZE REASONABLE EXTENSIONS
Appellees concede that they have a duty “to make water service reasonably available within the city and to treat those similarly situated, equally under the full guarantees of the State and Federal Constitutions.” There is no issue presented here concerning the area to be served by the city-owned water utility. Appellees acknowledge that they have the duty to serve all areas within the city limits, including newly developed ones. Exhibits in evidence show that Crownhill Park Subdivision is located in the northern sector of San Antonio and there are other subdivisions located in the general area in all directions from it, some inside and some outside of the city limits. There are existing mains 12 inches and larger in such subdivisions, and there are proposed 12 inch mains to be installed to the northeast of Crownhill and particularly to the north and northwest thereof, both inside and outside of the city limits.
The record herein establishes that the City of San Antonio has experienced tremendous growth and expansion over a long period of time. Its population increased from 253,854 in 1940 to 408,442 in 1950 — a growth of 154,588 persons. From 1950 to 1960 there was a population increase from 408,442 to 587,718 — a growth of 179,276 persons. The overall population increase from 1940 to 1960 was, therefore, 333,864 persons, an average increase of about 16,693 persons annually for 20 years. The number of water customers increased from 103,996 at the end of 1954 to 135,728 at the end of 1964, a total increase of 31,732, an average increase of 3173 annually, all of which, along with other matters,, is shown by Appendix B attached hereto. The authorities heretofore cited, including the Texas decisions (Wiggins, Kenner, Lockwood and Guthrie), the Lukrawka case from California, the New Jersey cases, the text statements from American Jurisprudence and the cases cited in support of same, all support the view that a city-owned water utility, like a privately-owned one having a franchise to serve a certain area, must anticipate the natural growth of the community it has undertaken to serve as a whole and to take reasonable measures to meet reasonable demands for water service by the growing community.
In People of State of New York v. McCall, 245 U.S. 345 , 38 S.Ct. 122 , 62 L.Ed. 337 , (1917), the court held in part as follows :
“These references to the evidence will suffice. They show this Public Service Commission ordering a public service corporation to render an important public service, under conditions such that in the aspect least favorable to the Gas Company the initial return upon the investment involved would be low but with every prospect of its soon becoming ample, and also that no claim was made by the company that the comparatively small loss which the company claims would result would render its business as a whole unprofitable.
“Corporations which devote their property to a public use may not pick and choose, serving only the portions of the *488 territory covered by their franchises which it is presently profitable for them to serve and restricting the development of the remaining portions by leaving their inhabitants in discomfort without the service which they alone can render. * * * »
In People of State of New York ex rel. Woodhaven Gaslight Co. v. Public Service Commission of New York, 269 U.S. 244 , 46 S.Ct. 83 , 70 L.Ed. 255 , (1925), the court held in part as follows.
“The company has long had the privilege of laying gas mains in the streets and other public ways of the town of Jamaica (now the Fourth ward of the borough of Queens) to distribute gas for street lighting and other purposes. It does not appear that any other utility is authorized to furnish gas there, and it is to be assumed that these communities are dependent upon this company for service. When reasonably required, the company is in duty bound to furnish gas to inhabitants of the territory covered by its franchise. People ex rel. Woodhaven Gas Co. v. Deehan, 153 N.Y. 528, 533 , 47 N.E. 787 . And the commission is empowered by statute to require reasonable extensions of the mains and service. Section 66 (2), Public Service Commissions Law, supra. In the territory already served by the company there are 150 consumers per mile of main. The sections for which service is ordered are residential communities. They have had water and electric service for many years. The houses already there, and those being built, are of a kind to indicate that, if brought within reach, gas will be used by the larger part of the inhabitants. There are good prospects of growth in the immediate future. The facts justify reasonable anticipation of a substantial and increasing demand for gas in the territory to be reached by the extensions.”
******
“It reasonably may be held that the location, present development, and prospects of growth of the communities ordered to be served justify the extension to them of gas service, if a nonconfiscatory rate can be obtained.
“But the company construes the order to require it to sell gas in the added communities at the existing rate, and it insists that, as the rate is so low that present consumers must be served at a loss, the addition of new territory will increase the loss. Even assuming that $1, fixed as the maximum rate, is noncompensatory, it does not follow that the order in question is unreasonable or invalid. This case is to be distinguished from a suit to restrain the enforcement of legislation prescribing a confiscatory rate. Here the rate is not involved. The order directs the extension; it does not deal with compensation. The commission reasonably might assume that the company mill take appropriate steps to save its property from confiscation. Newton v. Consolidated Gas Co., 258 U.S. 165, 174, 177 , 42 S.Ct. 264 , 66 L.Ed. 538 . * * * ” (Emphasis supplied)
In Ridley v. Pennsylvania Public Utility Commission, 172 Pa.Super. 472 , 94 A.2d 168 (1953) the court said:
“A public utility cannot collect the cream in its territory and reject the skimmed milk. ‘A public service corporation may not “pick and choose” only presently profitable territory covered by its franchise. If a portion of the territory served is not profitable, but the entire service produces a fair return on the investment, the utility may still be required to serve the unprofitable portion, if the rendering of such service does not result in an unreasonable burden on its other service.’ Phila. Rural T. Co. v. Public Service Comm., 103 Pa.Super. 256, 261 , 158 A. 589, 591 . Although the Company does not enjoy a monopoly in the Township it is obliged to render service within a reasonable distance from its distribution system, and if it takes only the profitable business no other water company will enter the area to pick up the unprofitable business which it declines. No other *489 company will become ‘a snapper-up of its unconsidered trifles.’
“The reasonableness and validity of the Commission’s suggestion that appellants bear part of the cost of the extension rests upon the same factors hereinbefore discussed. Ordinarily, it is not the business of the citizen or consumer to construct any part of a utility’s system. There are, doubtless, instances where, under special circumstances, warranted by the evidence, the Commission may, in the exercise of its administrative discretion, withhold exercise of its power unless patrons offer to participate in the cost of construction. Altoona v. Pa. P. U. C., 168 Pa.Super. 246 , 77 A.2d 740 . But no inflexible rule can be laid down; participation in construction costs cannot be exacted indiscriminately; and it cannot be required upon a mere showing that an extension will not immediately produce an adequate profit. The action of the Commission must rest upon evidence which shows that, without the contribution or loan of the consumers, the cost of construction would materially handicap the utility in securing a fair return on all its operations. Riverton Consolidated Water Co. v. Public Service Comm., 105 Pa.Super. 6 , 159 A. 177 . Such proof, as already indicated, is lacking.
“The obligation imposed upon the Commission to exercise its powers and discretion reasonably applies as well to patrons and the public as to the utilities. The Commission operates on a two-way street. ‘The primary object of the public service laws is not to establish a monopoly or to guarantee the security of investment in public service corporations, but first and at all times to serve the interests of the public.’ Hoffman v. Public Service Comm., 99 Pa.Super. 417, 429 . * * * if
******
“This case does not fit in the factual pattern of the precedents upon which the Company relies. Appellants do not reside in a small hillside settlement without prospects of future development or in a moribund mining village. They are residents of suburban Philadelphia, adjacent to the City of Chester, within a few minutes of travel to the center of the metropolis, and of a community whose increase of population during the last decade denotes civic stability and presages continued healthy growth and expansion. Nothing in the record suggests ‘over development or premature development of scattered sections of’ the Township ‘in advance of its normal growth’, and while the immediate returns from the extension may not now equal the overall return of the Company it cannot be said, on this record, that ‘there is no rational expectation of the event justifying the expenditure.’ These people are entitled to fire protection and domestic water service without subsidizing a large and prosperous utility.” 94 A.2d 171 -172. (Emphasis supplied.)
It is apparent that the principal vice in the regulations is that they do not recognize that there is any such thing as a reasonable extension of “on-site” water mains. The city-owned water utility will not pay for same in any event, no matter how reasonable in fact the extension may be. The out of State cases recognize that there is a midway situation between extensions which a Municipal Water Utility is required to make and those which it is not required to make at its initial or whole cost. This midway situation has been met by various methods. One of these is the so-called revenue-refund contract, under which the developers or new customers furnish the original capital outlay required to make the requested extensions with the right to reimbursement for same from a percent of revenues from water sold by the Municipality because of the particular extensions. This method is sometimes the subject of a contract and in some jurisdictions is provided for by orders of Public Utility Commissions or similar bodies. In such case the utility ultimately contributes to the capital outlay only to the extent that actual sales of water produces revenue to furnish *490 the same. If there are no sales of water the Utility is not required to make any capital expenditures for the particular extension. On the other hand the developers or new customers who furnish the necessary capital expenditure in order to receive water are given an opportunity to be reimbursed to the extent that actual sales of water from the facilities which they have paid for contribute to the capital outlay. The revenues may be sufficient over a period of time to completely reimburse them for their capital expenditure; but, if not, they lose to that extent. In other words, a particular extension is determined to be reasonable or not reasonable in the light of experience. See City of Nederland v. Callihan, 299 S.W.2d 380 (Tex.Civ.App.1957, writ ref. n. r. e.) ; Ridley v. Pennsylvania Public Utility Commission, supra.
The reasons advanced by appellees in support of the regulations are not legally sufficient to justify the provisions here in question when tested by the proper factors of reasonableness. These matters will be further considered in connection with the questions of discrimination, equal protection and due process of law.
I agree with appellant that a Municipal Water Utility, such as the one here in question, has the duty to make extensions of its water mains, including “on-site” mains, at its own cost, where the request for such extension is reasonable, considering its proper factors. The regulations in question violate that rule by adoption of a policy which fully and finally shifts the capital cost of “on-site” mains to the developer and new customer in all cases.
IV.
WHETHER A PROPRIETARY OR GOVERNMENTAL FUNCTION IS EXERCISED BY THE BOARD IN PROMULGATING REGULATIONS. POLICE POWER ARGUMENT.
On this phase of the case appellant’s first point of error along with appellee’s first counterpoint will be considered.
Appellant’s first point is as follows:
“The trial court erred in concluding that appellees act in a legislative or governmental capacity in prescribing rules and regulations for the operation of their municipal water supply system.”
Appellees’ first counterpoint reads as follows :
“The trial court correctly ruled that the City of San Antonio in prescribing regulations governing the extension of water service acts in a legislative or governmental capacity.”
Here involved are conclusions of law numbers 5, 7 and 8, reading as follows:
“5. Defendant, in owning and operating through its Board of Trustees the municipal water supply system for the City of San Antonio, acts in a proprietary capacity, but in fixing rates and prescribing rules and regulations for operation of such system, it acts in a legislative and governmental capacity.”
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“7. The Water Works Board of Trustees of the City of San Antonio is an agency of the City of San Antonio authorized by statute and ordinance to manage and control the water works system of the City of San Antonio and said Board has been delegated legislative and governmental powers for such purpose. Article 1109a, Section 4, V.A.T.S., City of San Antonio Ordinance No. 24819, Sec. 27(a).
“8. Except with respect to fixing rates and charges for service, said Board of Trustees has full power and authority, absent constitutional infringement, with reference to: control, management and operation of the system; the expenditure and application of revenues; the making of rules and regulations governing the furnishing of water service; and has full authority with reference to making extensions to the extent authorized by law. Article 1109a, Section 4, V.A.T.S., City *491 of San Antonio Ordinance No. 24819, Sec. 27(a).”
I agree with the first portion of conclusion No. 5 holding that the “Defendant, (meaning the “City” as hereinbefore defined) in owning and operating through its Board of Trustees the municipal water supply system for the City of San Antonio, acts in a proprietary capacity, * * * ” I also agree that the City, “in fixing rates * * acts in a legislative and governmental capacity.” I also agree with the first portion of conclusion number 7 holding that “The Water Works Board of Trustees of the City of San Antonio is an agency of the City of San Antonio authorized by statute and ordinance to manage and control the water works system of the City of San Antonio. * * * ” However, I disagree with the last portion of conclusion No. 5 holding that the city in “prescribing rules and regulations for operation of such system, * * * acts in a legislative and governmental capacity.” I also disagree with the last portion of conclusion No. 7 that “said Board has been delegated legislative and governmental powers for such purpose (management and control).”
Appellant here relies in part on the statutes and cases which I have mentioned in section number II of this opinion, particularly articles 1109a and 1110c and Wiggins, Kenner, Lockwood and Guthrie , and the case of City of Big Spring v. Board of Control, 404 S.W.2d 810, 811, 812 (Tex.Sup.1966), wherein the Court said:
“Under the first point it is argued that by the contract the City of Big Spring surrendered its right to determine the rates to be charged water users for water; that this is a legislative or governmental function, and a contract which is a surrender by the City of such rights is therefore void. Cases discussing governmental functions of a city and its inability to delegate or surrender these functions are cited to sustain this point. We have no quarrel with these cases. In the case we have before us the City is exercising a proprietary or business function only. In such capacity a city can make a contract, under authority of legislative enactment, in all things as an individual or private corporation. City of Texarkana v. Wiggins, 151 Tex. 100 , 246 S.W.2d 622 (1952); City of Crosbyton v. Texas-New Mexico Utilities Co., 157 S.W.2d 418, 420 (Tex.Civ.App., 1942, error refused, want of merit); 39 Tex. Jur.2d 638, § 308.”
In 39 Tex.Jur. Municipal Corporations, Sec. 308, pages 638-639, the following appears :
“Municipal or corporate functions and acts are those intended primarily for the private advantage and benefit of persons within the corporate limits of the municipality, as distinguished from that of the public in general. Proprietary functions are imperative in part and discretionary in part. They include the proper care of public places, the establishment and maintenance of a municipal band, and the erection, maintenance, ownership, or operation of public utilities, such as gas and electric plants, water works, and street railways.”
In City of Crosbyton v. Texas-New Mexico Utilities Co., Tex.Civ.App., 157 S.W.2d 418, 420, 421 , the Court said:
“The law is well established in this state, as well as other jurisdictions in this country, that the functions of a city are dual in their nature. One element of such functions is designated as governmental or legislative and the other as proprietary, business or corporate functions. It is hardly necessary to cite authority in support of the proposition that when a city is exercising those functions that are enjoined upon it by law, that is, those which it is bound to assume under the provisions of the statutes of the state or government which gives it life, it is considered to be an arm of the government and is acting for the people generally as an agency of the government. These powers and functions are, therefore, governmental in their nature *492 and can neither be ceded nor exercised in such manner as to bind the future course of the city or prevent modification or change of its policy if its governing body should thereafter wish to do so.”
“In the exercise of its proprietary or business functions, however, such as those which it exercises when it enters into a contract for the private interests of its own inhabitants or of itself, a municipal corporation is limited by no such restriction. It is at liberty to exercise these powers in the same way and to the same extent as individuals or private corporations and it is settled by a long line of decisions of the courts of this state that the ownership and operation of public utilities, such as water works, electric light plants and street railways, is not a governmental function but is proprietary in its nature and constitutes a business or corporate function of the city. City of Ysleta v. Babbitt, 8 Tex.Civ.App. 432 , 28 S.W. 702 ; Green v. City of Amarillo, Tex.Civ.App., 244 S.W. 241 ; Lenzen v. City of New Braunfels, 13 Tex.Civ.App. 335 , 35 S.W. 341 ; City of Wichita Falls v. Lipscomb, Tex.Civ.App., 50 S.W.2d 867 ; Community Natural Gas Co. v. Northern Texas Utilities Co., Tex.Civ.App., 13 S.W.2d 184 ; City of Galveston v. Rowan, 5 Cir., 20 F.2d 501 .
“It was under no statutory mandate to own and operate a system of water works nor did the law require it to furnish a system of street lights for the convenience of its urban population.”
Appellant’s contention is also supported by the case of Boiles v. City of Abilene, 276 S.W.2d 922 (Tex.Civ.App., Eastland, 1955, writ refused) wherein the applicable rules are reiterated as follows:
“ * * * The power of the City to regulate rates to be charged for water is governmental in character. Its power to acquire water works and furnish water therefrom is proprietary.”
The Eastland Court of Civil Appeals quoted with approval the holdings of the Supreme Court of Oregon in the case of Tone v. Tillamook City, 58 Or. 382 , 114 P. 938 , in part as follows:
“ * * * The power to provide a water system is not governmental nor legislative in its character, but strictly proprietary, and the city, when engaged in prosecuting such an improvement, is clothed with the same authority and subject to the same liabilities as a private citizen. This has been held by this court in an opinion by Mr. Justice Bean, which has become a leading case on this subject. Esberg Cigar Co. v. [City of] Portland, 34 Or. 282 , 55 Pac. 961 , 43 L.R.A. 435 , 75 Am.St.Rep. 651 .”
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“ * * * While regulations as to the manner of using the water and management of the business may be prescribed by ordinance or resolution, the legal position of the city is that of a proprietor, * * * ty
The authorities hereinabove cited are all in accord with the holdings in San Antonio Ind. Sch. Dist. v. Water Works Board of Trustees, 120 S.W.2d 861 (Tex.Civ.App., Beaumont, 1938, writ refused) concerning the proprietary nature of the function here involved and the functions to be performed by the Waterworks Board of Trustees.
In support of their first counterpoint appellees rely on the cases of City of Wink v. Wink Gas Co., 115 S.W.2d 973 (Tex.Civ.App., El Paso, 1938, wr. ref.) and City of Beaumont v. Calder Place Corp., 143 Tex. 244 , 183 S.W.2d 713 (1944). The City of Wink case involved Art. 1119, V.A.C.S., which is applicable to cities and towns incorporated under the general laws of the state. There the Board of Commissioners had originally enacted an ordinance prescribing rates to be charged for natural gas by a privately-owned utility, and later

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/9653212. Public record. Not legal advice.