UNPUBLISHED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Affirmed by unpublished per curiam opinion.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., Winston-
Salem, North Carolina, for Appellees. ON BRIEF: Welton O. Seal,
Jr., HUNTON & WILLIAMS, Raleigh, North Carolina, for Appel-
lant. 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Unpublished opinions are not binding precedent in this circuit.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 defen-
dants violated the antitrust laws and the Constitution when they
required certain customers of the utility to connect with the govern-
mental water system or suffer the loss of governmental sewage ser-
vices. 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 commis-
sion 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 Commis-
sion (unrelated to the joint city-county utilities commission) issued a
non-exclusive certificate of public convenience and necessity to Caro-
lina Water Service, Incorporated, to provide water service to residents
in the Lockhurst subdivision of Forsyth County. Although Lockhurst

                     2
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 Lock-
hurst 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 resi-
dents 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 con-
          nection 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 prem-
          ises 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 avail-
able 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 sew-
age 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

                    3
          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 contraven-
tion of the Due Process Clause; and (3) taken Carolina Water's prop-
erty 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 municipal-
ity, however, unless the municipality "demonstrate[s] that [its] anti-
competitive 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 pro-
tect 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.

                    4
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 doc-
trine), 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 pro-
          tect 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, how-
ever, 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.

                     5
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 enter-
prise, right, privilege, or immunity," id. § 160A-460(1) (Michie Supp.
1997). See also id. § 153A-278 (Michie 1991) ("Two or more coun-
ties, 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 gov-
ernment. 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 sew-
erage 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 consoli-
dated 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.

                    6
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 gov-
ernmental 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 capri-
cious" 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 pow-
ers 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

                    7
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 ser-
vice 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 sew-
age service and the water service, upon which continued sewage ser-
vice 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 provid-
ing 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 dis-
missing 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 pos-
sessed a non-exclusive franchise to operate a water distribution facil-
ity. 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.

                     8
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 regu-
lation 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 (plu-
rality 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 inescap-
able 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 con-
trolled 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 pur-
pose 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 com-
mission, which adopted policy resolutions, including Section 44, that
were also adopted as city ordinances. Section 44, which requires resi-
dents receiving sewage service from the City to connect to the City's

                     9
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 there-
fore would have understood that Carolina Water's non-exclusive fran-
chise 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 compa-
ny's "reasonable investment backed expectations" as such, it was pre-
cisely 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 pro-
vided by the publicly created utility system. Indeed, although the pub-
lic 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 com-
pany "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

                     10
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) (non-
exclusive franchises provided by the state "confer no contractual or
property right to be free of competition from . . . the state or munici-
pality 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 sub-
ject 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 Caro-
lina Water from providing its services to residents but has made its
services to those in Lockhurst highly undesirable. We remain uncon-
vinced that any monopolistic feature of the City's action is of consti-
tutional 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

                     11
unless subsidized through the city's power to collect revenue. But as
Stillings illustrates, that contingency "inhere[s] in" the State-
sponsored franchise as a "background principle." Lucas v. South Car-
olina 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 dis-
tinguished 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 compensa-
tion 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 eco-
nomically 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 prop-
erty can be characterized as a physical invasion by government than
when interference arises from some public program adjusting the ben-
efits 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 pursu-
ant to its existing non-exclusive certificate, or customers that (how-
ever unlikely) choose to forego City-provided sewage service.

Notably, the character of the government's action in this case dif-
fers markedly from that at issue in the Supreme Court's recent deci-
sion in Eastern Enterprises. There, the Court examined whether the

                    12
Coal Act (which sought to remedy problems in the funding of coal
miner health benefits) effected a taking by "impos[ing] severe retro-
active liability on a limited class of parties that could not have antici-
pated the liability." Eastern Enter., 118 S. Ct. at 2149 (plurity opin-
ion). 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 con-
duct. 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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