UNPUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

CAROLINA WATER SERVICE,

INCORPORATED, of North Carolina,

Plaintiff-Appellant,

v.

CITY OF WINSTON-SALEM, NORTH

CAROLINA, a North Carolina

Municipal Corporation; CITY OF

WINSTON-SALEM, NORTH CAROLINA,

Alderman and Wards, in their

No. 97-2586

official capacities; MARTHA S.

WOOD, in her capacity as Mayor of

the City of Winston-Salem;

WINSTON-SALEM/FORSYTH COUNTY

UTILITY COMMISSION, the Governing

Body of the City of Winston-Salem,

the members of in their official

capacities,

Defendants-Appellees.

Appeal from the United States District Court

for the Middle District of North Carolina, at Winston-Salem.

James A. Beaty Jr., District Judge.

(CA-95-636-6)

Argued: June 2, 1998

Decided: September 10, 1998

Before WIDENER, MURNAGHAN, and MOTZ, Circuit Judges.

_________________________________________________________________

Affirmed by unpublished per curiam opinion.
COUNSEL

ARGUED: Edward Smoot Finley, Jr., HUNTON & WILLIAMS,

Raleigh, North Carolina, for Appellant. Gusti Wiesenfeld Frankel,

WOMBLE, CARLYLE, SANDRIDGE & RICE, P.L.L.C., WinstonSalem, North Carolina, for Appellees. ON BRIEF: Welton O. Seal,

Jr., HUNTON & WILLIAMS, Raleigh, North Carolina, for Appellant. Roddy M. Ligon, Jr., WOMBLE, CARLYLE, SANDRIDGE &

RICE, P.L.L.C., Winston-Salem, North Carolina, for Appellees.

_________________________________________________________________

Unpublished opinions are not binding precedent in this circuit. See

Local Rule 36(c).

_________________________________________________________________

OPINION

PER CURIAM:

This appeal involves a utility's claims that governmental defendants violated the antitrust laws and the Constitution when they

required certain customers of the utility to connect with the governmental water system or suffer the loss of governmental sewage services. The district court rejected all of the utility's claims. We affirm.

I.

In 1976, the City of Winston-Salem and adjoining Forsyth County

entered into an interlocal agreement to consolidate their water and

sewer system. That agreement established a combined utility commission for the two local governments and assigned to the City authority

to operate and administer County water and sewage services.

Fifteen years later in 1991, the North Carolina Utilities Commission (unrelated to the joint city-county utilities commission) issued a

non-exclusive certificate of public convenience and necessity to Carolina Water Service, Incorporated, to provide water service to residents

in the Lockhurst subdivision of Forsyth County. Although Lockhurst

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is outside the City of Winston-Salem's geographic limits, the City,

pursuant to the interlocal agreement between the City and the County,

had been providing and continued to provide sewage service to Lockhurst residents.

In 1995 the City decided to provide water service as well to the

Lockhurst residents. The City refused to purchase Carolina Water's

water service facilities because a part of the system was constructed

from asbestos cement and would require replacement. Instead, the

City obtained separate facilities capable of servicing Lockhurst residents and connected these facilities to its water distribution plant.

Section 44 of the Water and Sewerage System Policy Resolutions,

enacted as a City ordinance, provides:

Whenever any premises shall have been connected with the

city sewer system, it shall be the duty of the owner of such

premises to make immediate application in writing for connection with the water system and to have such connections

made or to install an approved sewer-measuring device and

maintain same. . . . If the owner or occupant of such premises fails to connect to the water system or install an

approved sewer-measuring device, in the event that city

water becomes available to the premises, the city shall have

the right to go upon private premises to which such sewer

service is provided and to excavate and disconnect the sewer

service . . . .

In accordance with this ordinance, when public water became available the 22 Lockhurst residents were informed of the joint local utility

commission's new public water service capabilities. The residents

were notified that they had one month to comply with Section 44 by

connecting to the City's water supply system, or they would lose sewage service. The notice stated:

[Y]ou must purchase a water meter and connection from the

City of Winston-Salem no later than May 13, 1995 to avoid

disruption of your sewer service. In addition, you must sever

the water lines from the [Carolina Water] water system and

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connect to the City of Winston-Salem water system by the

above mentioned date.

The 22 Lockhurst residents discontinued service with Carolina

Water and connected with the public water system. Carolina Water

then filed this suit, alleging that the City, its aldermen, and the

Winston-Salem/Forsyth County Utility Commission had (1) violated

the antitrust laws; (2) invalidly exercised police power in contravention of the Due Process Clause; and (3) taken Carolina Water's property without compensation, contrary to the Takings Clause.

The district court granted the City's motion to dismiss with respect

to the constitutional claims. After discovery, the court granted the

City's motion for summary judgment with respect to the antitrust

claim, concluding that state action immunity protected the City from

antitrust liability.

II.

Carolina Water asserts that the City violated Sections 1 and 2 of

the Sherman Act, 15 U.S.C.A. §§ 1, 2 (West 1997), by "monopoly

leveraging" Lockhurst residents -- i.e., by forcing them to receive the

City's water service if they were to continue receiving sewer service.

The district court held the City immune from liability on the basis of

the state action doctrine.

Because the Sherman Act does not apply to the conduct of a state

acting through its legislature, states enjoy full immunity from federal

antitrust liability. See Town of Hallie v. City of Eau Claire, 471 U.S.

34, 38 (1985). State action immunity does not extend to a municipality, however, unless the municipality "demonstrate[s] that [its] anticompetitive activities were authorized by the State`pursuant to state

policy to displace competition with regulation or monopoly public

service.'" Id. at 39 (quoting City of Lafayette v. Louisiana Power &

Light Co., 435 U.S. 389, 413 (1978) (plurality opinion)). Carolina

Water maintains that the state action immunity doctrine does not protect the City; the company claims there is no "authorization of the

State upon which the [City] relies in asserting the state action

defense." Brief of Appellant at 30.

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In Hallie, the Supreme Court determined that a city was entitled to

state action immunity for its sewage treatment services because state

statutes granted cities the authority "to construct, add to, alter, and

repair sewage systems," and "to determine the areas to be served."

Hallie, 471 U.S. at 41-42. The Court reasoned that "[w]e think it is

clear that anticompetitive effects logically would result from this

broad authority to regulate." Id. at 42 (citing New Motor Vehicle Bd.

v. Orrin W. Fox Co., 439 U.S. 96, 109 (1978)). The Court explicitly

rejected the plaintiff's argument that "a legislature must expressly

state in a statute or its legislative history that the legislature intends

for the delegated action to have anticompetitive effects," because

"[t]his contention embodies an unrealistic view of how legislatures

work and of how statutes are written." Id. at 43; see also Pinehurst

Enter., Inc. v. Town of Southern Pines, 690 F. Supp. 444, 448-50

(M.D.N.C. 1988) (North Carolina statutes authorizing cities to operate

public enterprises are sufficient evidence of state policy recognizing

anticompetitive effects so as to invoke the state action immunity doctrine), aff'd, 887 F.2d 1080 (4th Cir. 1989) (table).

The North Carolina legislature has provided counties and cities

with broad authority to operate and regulate "public enterprises,"

including water systems. See N.C. Gen. Stat.§§ 153A-274, -275, -284

(Michie Supp. 1997) (counties); id. #8E8E # 160A-311, -312, -317 (Michie

1994 & Supp. 1997) (cities). For example:

A county may adopt adequate and reasonable rules to protect and regulate a public enterprise belonging to or operated

by it. The rules shall be adopted by ordinance, shall apply

to the public enterprise system both within and outside the

county, and may be enforced with the remedies available

under any provision of law.

Id. § 153A-275; see id. § 160A-312 (same authority for cities). State

law even specifically provides that a county or city may "require the

owner" of property to "connect the owner's premises with" the water

and sewage lines operated by the county or city. Id. § 153A-284

(county); see id. § 160A-317 (city). Carolina Water maintains, however, that the City's action in this case lacked the requisite state

authority to regulate water service outside its jurisdiction in Lockhurst

-- a subdivision of the neighboring county.

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But North Carolina law expressly authorizes local governments to

cooperate in exercising the powers granted to each:"[a]ny unit of

local government in this State and any one or more other units of

local government . . . may enter into contracts or agreements with

each other in order to execute an undertaking," id. § 160A-461

(Michie 1994), which in turn is defined as "the joint exercise by two

or more units of local government, or the contractual exercise by one

unit for one or more other units, of any power, function, public enterprise, right, privilege, or immunity," id. § 160A-460(1) (Michie Supp.

1997). See also id. § 153A-278 (Michie 1991) ("Two or more counties, cities, or other units of local government may cooperate in the

exercise of any power granted by this Article . . . .").

Based on this authority, the North Carolina Supreme Court has

stated that when a local governmental unit -- pursuant to an interlocal

cooperative agreement -- operates a water and sewage system for

another local governmental unit, the operating unit can exercise all of

the rights for both local units with respect to that system. See McNeill

v. Harnett County, 398 S.E.2d 475 (N.C. 1990). The McNeill court

reasoned that one local unit "may, among other things, operate a

water and/or sewer system for and on behalf of another unit of local

government . . . and in conjunction therewith may exercise those

rights, powers, and functions granted" to the other unit of local government. Id. at 479.

As the Supreme Court did in similar circumstances in Hallie, we

believe the "foreseeable result" of this broad legislative grant of

authority would logically include anticompetitive effects. Hallie, 471

U.S. at 42. In this case, the City of Winston-Salem and Forsyth

County executed an interlocal agreement to consolidate their water

and sewage systems. They established the utility commission in 1976,

and empowered it as "the policy making board for all water and sewerage facilities operated by the City." Pursuant to statutory authority

permitting one local government unit to operate the water and sewage

systems of another local government unit, the agreement charged the

City with ultimate responsibility for "direct operation" of the consolidated system. Thus, based on this interlocal agreement, the City had

the requisite state authorization to control the terms and conditions of

water and sewage services for Lockhurst residents, and state action

immunity extends to the City.

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III.

Carolina Water also asserts that Section 44 constitutes an invalid

exercise of the City's police power and violates the Due Process

Clause. A court will uphold a governmental exercise of police power

provided some reasonable basis exists for the action. See, e.g.,

Goldblatt v. Town of Hempstead, 369 U.S. 590, 595 (1962)

("`debatable questions as to reasonableness are not for the courts but

for the legislature'") (quoting Sproles v. Binford, 286 U.S. 374, 388

(1932)). Thus, "[t]he police power is one of the least limitable of governmental powers." Queenside Hills Realty Co., Inc. v. Saxl, 328 U.S.

80, 83 (1946). More than seventy years ago we specifically rejected

a due process challenge by the bondholders of a private utility, with

a nonexclusive franchise to supply electric lights, water and sewage,

to a North Carolina city's issuance of bonds to construct a public

light, water and sewage system. See Hill v. Elizabeth City, 298 F. 67

(4th Cir. 1924). Nevertheless, Carolina Water asserts that the City's

enforcement of its duly enacted ordinance is "arbitrary and capricious" and that "City witnesses gave no plausible explanation" for the

ordinance's existence. This contention has no merit.

The North Carolina Supreme Court has specifically noted that

assessing sewage service charges based on water consumption "is a

reasonable and valid regulation." Covington v. Rockingham, 146

S.E.2d 420, 424 (N.C. 1966) (internal quotation marks omitted). An

assistant city manager explained in deposition the specific reasons for

Section 44, including the City's preference for relying on its own

water meters (rather than those of a private company) for reasons of

efficiency and reliability. Furthermore, state law expressly permitted

the City and County "to enter into an interlocal agreement, whereby

the City could exercise on behalf of the [utility commission]" all powers possessed by the county under state law, including the power to

operate water systems and to require citizens to connect to the water

systems.

Carolina Water's reliance on Dale v. City of Morgantown, 155

S.E.2d 136 (N.C. 1967), is misguided. In Dale , a property owner had

been denied electrical service in part because of unrelated housing

code violations. Id. at 139. The court held that a "supplier of electric

power, or other public service, may not lawfully refuse its service

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because of a controversy with the applicant concerning a matter which

is not related to the service sought." Id. at 141 (emphasis added).

Thus, the court relied on the fact that the provision of electrical service and the housing code violation were unrelated, and that the

asserted housing code violation was "a matter collateral to the duty

of the city to supply electric power for use in the structure." Id. at 142.

In the case at hand, there exists no similar argument that the sewage service and the water service, upon which continued sewage service is conditioned, are unrelated. The City required residents to

obtain water service from the utility commission in order to continue

their sewage service precisely because it uses water meter readings to

assess sewage service charges, and because it determined that providing an integrated system where available proved more efficient and

reliable. Indeed, the water and sewage services are so interconnected

that the system is denominated the "Water and Sewerage System."

IV.

Finally, Carolina Water contends that the district court erred in dismissing its claim that the City deprived it of property without just

compensation in violation of the Takings Clause. Specifically, the

company asserts that the City violated its constitutional rights when

the City required Lockhurst residents to use the public water service

if they wanted to continue to use public sewage service.

Relying on our holding in Durham v. North Carolina, 395 F.2d 58

(4th Cir. 1968), the district court held to the contrary. In Durham, we

rejected a similar Takings Clause argument when a public enterprise

established water and sewage services in an area that a private water

company had previously serviced. We dismissed the private water

company's suit in Durham, noting that the water company only possessed a non-exclusive franchise to operate a water distribution facility. We reasoned that "it has long been settled that the holder of a

non-exclusive franchise . . . cannot complain of competition from a

publicly-created utility system." Id. at 60 (citing Hill v. Elizabeth

City, 298 F. 67 (4th Cir. 1924)). Moreover, we held that "the creation

by a State of a competing public utility does not amount to a `taking'

compensable under the fourteenth amendment." Id.

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Carolina Water relies on more recent Supreme Court takings cases

in which the Court has examined three factors to determine whether

a regulatory taking has occurred: (1) the economic impact of the regulation on the claimant; (2) the extent to which the regulation interferes

with investment-backed expectations; and (3) the character of the

government action. See Eastern Enter. v. Apfel , 118 S. Ct. 2131, 2146

(1998) (plurality opinion); Connolly v. Pension Benefits Guar. Corp.,

475 U.S. 211, 224-25 (1986) (citing Penn Cent. Transp. Co. v. New

York City, 438 U.S. 104 (1978)).

As the Supreme Court has pointed out, "it would be surprising

indeed to discover" that a regulation satisfying Due Process amounts

to an unconstitutional taking. Eastern Enter. , 118 S. Ct. at 2148 (plurality opinion) (quoting Connolly, 475 U.S. at 223). This is not that

"surprising" case. Cf. id. at 2149-53. Rather, examination of the

record in light of the Connolly and Durham factors leads to inescapable conclusion that Carolina Water's Takings Clause claim fails.

Although the City's actions may well have a serious economic impact

on Carolina Water, the other two Connolly factors weigh against the

company.

First, Carolina Water could not have harbored a reasonable

investment-backed expectation that the City would never take this

action. The state and local governments of North Carolina have

highly regulated the water service industry. Carolina Water's ability

to service residents derived from a non-exclusive certificate, and its

right to continue providing water service remained at all times controlled by the North Carolina Utility Commission, which could revoke

or suspend the franchise. See N.C. Gen. Stat. §§ 62-112, -113 (Michie

Supp. 1997).

Moreover, a reasonable investor would have considered that state

statutes permitted cities and counties to form joint entities for the purpose of providing water and sewage services such that the City could

provide these services to County residents. In fact, the interlocal

agreement relevant to this case was executed in 1976. At that time,

Winston Salem and Forsyth County established their joint utility commission, which adopted policy resolutions, including Section 44, that

were also adopted as city ordinances. Section 44, which requires residents receiving sewage service from the City to connect to the City's

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water service where available, put Carolina Water on notice that the

City could develop an integrated system that likely would severely

restrict Carolina Water's customer base. A reasonable investor therefore would have understood that Carolina Water's non-exclusive franchise left open the possibility that the public authority might create its

own water service and might integrate that service with its sewage

service, particularly given the historically public nature of water and

sewage systems.

Although in Durham we did not discuss the private water company's "reasonable investment backed expectations" as such, it was precisely the company's lack of such expectations that animated our

holding that the government had not deprived it of property without

compensation. Carolina Water attempts to distinguish Durham by

noting that in Durham the publicly created utility system provided

open competition for the private water company, while in this case the

City's conduct was "coercive and anti-competitive" because it

required customers to connect to its system or lose sewer services.

Thus, the company contends that the anticompetitive nature of the

City's action distinguishes the constitutional implications of this case

from Durham, where the public authority merely entered the water

service market as a competitor of the private company and not as a

government exercising its police power in a manner shielded from the

antitrust laws solely because it is a state actor. But we did not base

our holding in Durham on the extent or effect of the competition provided by the publicly created utility system. Indeed, although the public utility in Durham did not condition continued sewage service on

the acceptance of public water service, we nonetheless deemed it

"[u]nquestionabl[e]" that public service might render the private company "unable to compete," thereby calling the company's "continued

existence" into "jeopard[y]." Durham, 395 F.2d at 61. Durham

focussed on the fact that the private water company, like Carolina

Water, had only non-exclusive franchise rights. See id. at 60. A party

with such rights does not enjoy a reasonable investment-backed

expectation that the government will not disturb them.

For example, in Helena Water Works Co. v. City of Helena, 195

U.S. 383 (1904), the Supreme Court upheld (against a takings claim)

the City of Helena's right to establish its own water system even if

it made a private company's system unprofitable. The Court

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explained that the private company had a non-exclusive franchise and

noted that "[h]ad it been intended to exclude the city from exercising

the privilege of establishing its own plant, such purpose could have

been expressed by apt words." Id. at 392; see also Tennessee Elec.

Power Co. v. Tennessee Valley Auth., 306 U.S. 118, 139 (1939) (nonexclusive franchises provided by the state "confer no contractual or

property right to be free of competition from . . . the state or municipality granting the franchise").

Similarly, in Stillings v. City of Winston-Salem , 319 S.E.2d 233

(N.C. 1984), the North Carolina Supreme Court held that a solid

waste collection company, which had franchise rights in County areas

subsequently annexed by the City, was not entitled to compensation

for a taking despite the fact that the City's public utility offered its

garbage collection services to residents for free and, therefore,

assertedly did not fairly compete with the private franchisee. The

court reasoned that "it is essential to realize that `all grants of . . .

franchises . . . are taken subject to existing laws,'" id. at 237 (quoting

Chesapeake & Ohio Rwy. Co. v. Miller, 114 U.S. 176, 188 (1885))

(ellipses in original). The company's franchise therefore existed subject to the possibility that, under State law, the areas might be

annexed by the City and open to the City's provision of free service

-- a valid exercise of its police power. Id. Moreover, the City's

actions did not actually "prohibit the plaintiffs from carrying on their

collection of solid waste." Id. at 238. Even though the action of the

public utilities had "diminished or destroyed" the value of the private

franchise, the court found no taking and noted that"[i]t is generally

accepted that a governmental agency is not precluded from competing

with its franchisee." Id.

The case before us closely resembles Helena Water Works,

Durham, and Stillings in that the City has not directly blocked Carolina Water from providing its services to residents but has made its

services to those in Lockhurst highly undesirable. We remain unconvinced that any monopolistic feature of the City's action is of constitutional moment. In all three of these cases, the courts clearly

understood that the presence of the publicly controlled service would

severely devalue the private company's pre-existing franchise.

Indeed, the provision of free services in Stillings strikes us as at least

equally anticompetitive: the "free" services could not be provided

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unless subsidized through the city's power to collect revenue. But as

Stillings illustrates, that contingency "inhere[s] in" the Statesponsored franchise as a "background principle." Lucas v. South Carolina Coastal Council, 505 U.S. 1003, 1029-30 (1992). Moreover, in

Stillings the court found no taking had occurred despite the fact that

the private company held an exclusive franchise whereas in this case

Carolina Water possessed only a non-exclusive franchise.

The final Connolly factor -- the character of the government action

-- also offers Carolina Water no support. The Supreme Court has distinguished between a "physical invasion" of one's property and the

effects of government regulation. See Eastern Enter., 118 S. Ct. at

2146 (plurality opinion); Loretto v. Teleprompter Manhattan CATV

Corp., 458 U.S. 419, 426 (1982). A government regulation may in

fact go so far as to violate the Takings Clause unless just compensation is provided. See Eastern Enter., 118 S. Ct. at 2146 (plurality

opinion) ("economic regulation[s] . . . may. . . effect a taking");

Lucas, 505 U.S. at 1015, 1027-31 (a regulation that "denies all economically beneficial or productive use" of property "beyond what the

relevant background principles would dictate" amounts to a taking

requiring just compensation). However, the Court has stated that "[a]

`taking' may more readily be found when the interference with property can be characterized as a physical invasion by government than

when interference arises from some public program adjusting the benefits and burdens of economic life to promote the common good."

Penn Cent., 438 U.S. at 124 (internal citation omitted); see also

Eastern Enter., 118 S. Ct. 2146 (plurality opinion); Connolly, 475

U.S. at 225.

In this case, the City's actions did not constitute a physical invasion

of Carolina Water's property. The City did not appropriate Carolina

Water's lines; the City did not use the lines; the City did not prohibit

their use by the company. Carolina Water does not even maintain that

it is unable to service customers in other County subdivisions pursuant to its existing non-exclusive certificate, or customers that (however unlikely) choose to forego City-provided sewage service.

Notably, the character of the government's action in this case differs markedly from that at issue in the Supreme Court's recent decision in Eastern Enterprises. There, the Court examined whether the

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Coal Act (which sought to remedy problems in the funding of coal

miner health benefits) effected a taking by "impos[ing] severe retroactive liability on a limited class of parties that could not have anticipated the liability." Eastern Enter., 118 S. Ct. at 2149 (plurity opinion). Four Justices relied on the retroactive character of the

government action to find an unconstitutional taking, concluding that

the legislation improperly imposed liability "based on the [plaintiff's]

conduct far in the past." Id. at 2153.

By contrast, here the regulation requiring residents to obtain their

water service from the City if they also obtain their sewage service

from the City does not retroactively burden Carolina Water. Rather,

the company's non-exclusive franchise necessarily contemplated the

possibility that public authorities might decide to provide their own

water system and (given the broad regulatory authority provided by

State law) might decide the most efficient and reliable system

required unification of water and sewage services. Unlike Eastern

Enterprises, the government action here does not regulate past conduct. Indeed, it does not directly regulate Carolina Water's conduct

at all. It simply renders Carolina Water's services wholly undesirable

as a practical matter.

V.

In sum, we affirm the district court's dismissal of Carolina Water's

constitutional arguments and its grant of summary judgment with

respect to Carolina Water's antitrust claim.

AFFIRMED

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