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SCOTUS Leaves Circuit Split Alone; Law Unsettled on Section 1926(b) Service Area Rights in Indiana

Are rural water associations that provide both sewer and water services but only receive a federal loan pertaining to one of those services protected under federal statute from encroachment by other utilities? After the Supreme Court of the United States (“SCOTUS”) declined to take a case that would have resolved a Circuit split on this issue, the law remains unclear in most of the country, including Indiana.

Statutory Protection

The U.S. Department of Agriculture, under 7 U.S.C. Section 1926, authorizes the federal government to make or insure loans to rural water and wastewater associations to promote rural development. For purposes of ensuring the government can be repaid, 7 U.S.C. Section 1926(b) (“Section 1926(b)”) reads in part:

The service provided or made available through any such association shall not be curtailed or limited by inclusion of the area served by such association within the boundaries of any municipal corporation or other public body, or by the granting of any private franchise for similar service within such area during the term of such loan[.]

The issue facing courts interpreting this statute for utilities providing both water and sewer service but only having a federal loan for one of those services is whether “service” in the statute pertains just to the service for which the rural water association obtained the loan, or if receiving a loan for one type of service provides protection to the rural water association’s other service offering.  

Circuit Split

In 2010, the 8th Circuit Court of Appeals (the “8th Circuit,” which covers Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota and South Dakota) addressed this as an issue of first impression. Public Water Supply District No. 3 of Laclede County, Missouri (“District No. 3”) provided both drinking water and sewer services. District No. 3 received a federal loan in 2007 to improve and extend its sewer system and had no federal debt related to its provision of water service. The nearby City of Lebanon, Missouri (“Lebanon”), provided water and sewer service to some customers in the same territory as the District No. 3 prior to the time District No. 3 obtained its federal loan for sewer service. After District No. 3’s federal loan closed, Lebanon extended water services within District No. 3’s boundaries to additional customers who were not already being served by the district.

District No. 3 sued Lebanon, claiming it violated Section 1926(b). The 8th Circuit ruled in favor of Lebanon, finding District No. 3’s water utility service rights were not eligible for Section 1926(b) protection as a result of having a federal loan for sewer service.

Seven years later, the 5th Circuit Court of Appeals (the “5th Circuit,” which covers Texas, Louisiana and Mississippi) rejected the reasoning of the 8th Circuit under similar factual circumstances. The 5th Circuit ruled in favor of Green Valley Special Utility District (“Green Valley”) in a case originating in Texas. Green Valley provided water and sewer services and obtained a loan to extend its water utility. Green Valley had no federal loan related to its sewer service. The City of Cibolo, Texas (“Cibolo”), sought to provide sewer service within its corporate boundaries by filing an application with the Public Utility Commission of Texas, and that territory included some of Green Valley’s sewer and water service territory.

Green Valley sued under Section 1926(b). The 5th Circuit held that Green Valley’s sewer utility rights were also protected from encroachment by other utilities. The court reasoned that “service” should be construed in its broadest sense and that other uses of “service” in Section 1926 were not indicative that Congress had intended “service” to apply only to the service for which the federal government had extended a loan.

Cibolo appealed to the SCOTUS in December 2017. After briefings from the parties, several amici and the Solicitor General (whom the SCOTUS had requested to file a brief), the SCOTUS denied Cibolo’s petition for writ of certiorari on January 7, 2019.

Indiana Impact

As a result of the denial by the SCOTUS to resolve the Circuit split, the respective decisions by the Circuit courts remain in place. What does this mean for rural water and wastewater associations in Indiana? The 7th Circuit Court of Appeals (covering Indiana, Illinois and Wisconsin) has not been presented with the issue determined in the Lebanon and Cibolo cases, so the law is unsettled in Indiana on this issue.

Notwithstanding the unsettled law, utilities — both rural water associations and municipal utilities — should carefully consider their conduct when deciding whether Section 1926(b) applies. Courts will often look at the context of a case to determine how it should be resolved. For instance, in the 8th Circuit case, the federally indebted utility (District No. 3) sued to stop a nearby municipality (Lebanon) that was already providing service inside its service area from expanding its service. In that case, it looks like the federally indebted utility tried to obtain the federal loan to gain the upper hand in its competition for customers (the 8th Circuit opinion is silent as to whether this was the case).

In contrast, in the 5th Circuit case, the municipality (Cibolo) appeared to be the aggressor by filing for service rights with the Public Utility Commission of Texas over areas already served by the federally indebted utility (Green Valley). The federally indebted utility appeared to have used Section 1926(b) as protective measure rather than as a weapon. Context is important – oftentimes, bad facts manifest themselves in bad results.

Know Your Rights

This article addresses just one aspect of utility service territory law. The law provides myriad other issues to be wary of in determining utility service areas. If you have questions about utility service territories and whether your utility can serve in an area or what your rights might be, please contact us today.

  • Partner

    Dave is Chair of the Utilities and Environmental Practice Group. He counsels clients on regulatory and transactional matters involving businesses, real estate, utilities and energy. He advises clients on a broad range of issues ...

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