1926(b) - What is it? How can it help your water district? By Steven M. Harris 7 U.S.C. 1926(b) is a statute created by the United States Congress for the specific purpose of protecting "federally indebted" rural water districts from competition by neighboring cities. Congress wanted to better insure that the water cost to rural residents be reduced, and a water district's ability to repay its debt to the government be strengthened. 1926(b) places federal limitations on a municipality's legal right to sell water, when the exercise of those powers would result in competition with a rural water district. In the mid-1970's Rural Water District # 3, Washington County, Oklahoma sued the City of Owasso's Utility Authority to enforce its right to be the exclusive water service provider within its territory under 1926(b). The Owasso Utilities Authority had invaded the water district's territory and was serving customers in competition with the water district. Following trial, the Court ordered the defendant Owasso Utility Authority restrained from "any additional or further expansion of its services within the geographical confines of the territory of Plaintiff, but permitting the Owasso Utilities Authority to continue to serve the 223 homes which it is presently serving within the territory of the plaintiff" (water district). The lesson learned in Owasso is clear: If you don't act early, you may lose those customers taken by the City, before the suit is eventually decided. Municipalities covet the territory and customers of rural water districts. It means more revenue from captive customers. It represents a source of revenue from real estate developers who customarily pay the cost of line extensions. The power to terminate water service, is the single most effective tool in enforcing payment of bundled services provided by cities (trash service, sewer service, etc.). As a result, cities nation-wide, have aggressively sought the territory of rural water districts and attacked 1926(b) at every opportunity with increasingly creative ways, to gain valuable territory for present and future water sales. The most common method of gaining a water district's territory is to simply extend lines into the district, begin selling water in competition with the water district, and wait to see what happens. The cities of Tulsa, Glenpool and Jenks extended their water lines into the territory of Creek County Rural Water District #2 (Creek County, Oklahoma). After lengthy negotiations failed to settle the dispute, District #2 pursued all three cities in federal court. In Glenpool (the first case filed), District #2 lost at trial, but appealed to the 10th Circuit Court of Appeals and won. In Glenpool Utility Services Authority v. Creek County Rural Water District #2, 861 F.2d 1211 (10th Cir.1988) the Appellate Court agreed with other Courts who had considered the issue, and concluded that 1926(b) "should be applied broadly to protect rural water associations indebted to the FmHA from competition from expanding municipal systems". District #2 eventually settled with Glenpool, Jenks and Tulsa, with the water district receiving substantial compensation from each of the cities. In the mid-1980's the city of Madison, Mississippi tried a more creative approach using its legal authority to take land and facilities from Bear Creek Water Association (rural water utility) through eminent domain proceedings (condemnation). Bear Creek counter-sued to restrain Madison. The Court in City of Madison, Miss v. Bear Creek Water Assn, Inc., 816 F.2d 1057 (5th. Cir.1987) created the "bright line rule" that "prohibits condemnation through the FmHA loan term". Madison had hoped to defeat 1926(b) through a legal technicality. The Court responded: "To read a loophole into this absolute prohibition, as Madison would have us do, and allow the city to do via condemnation what is forbidden by other means would render nugatory the clear purpose of 1926(b)". The 5th Circuit showed great insight into the underlying purpose in Madison's attempt to gain territory, facilities, and money from customers. The Court of Appeals stated: "The case at bar exemplifies the evil Congress wished to avoid. Bear Creek's affidavits showed that Madison desired to condemn 60% of its facilities and 40% of its customers, including the most densely populated (and thus most profitable) territory now served by Bear Creek. Even if fair value is paid for the lost facilities, such an action would inevitably have an adverse effect on the remaining customers of Bear Creek, in the form of lost economies of scale and resulting higher per-user costs. To allow expanding municipalities to "skim the cream" by annexing and condemning those parts of a water association with the highest population density (and thus the lowest per-user cost) would undermine Congress's purpose of facilitating inexpensive water supplies for farmers and other rural residents and protecting those associations' ability to repay their FmHA debts." Have these judicial decisions dissuaded municipalities? Not for a minute. It has only persuaded cities to dig deeper to find a new and better way to evade 1926(b). In 1997 Pittsburg County Rural Water District (based in Arpelar, Oklahoma) sued the City of McAlester, Oklahoma, in federal court under 1926(b) to enforce the district's right to be the exclusive provider of water service within its territory and to restrain the City from competing for its customers. The City of McAlester responded to the suit by petitioning the Pittsburg County Commissioners for deannexation of the water district territory in controversy. Although Oklahoma State statutes permit county commissioners to deannex portions of a water district's territory, it requires a specific finding that the deannexation is in the best interests of both the petitioning land owner and the water district. Despite considerable opposition presented by District #7, that the deannexation would cause the water district to lose significant sums of money, and may cause a default of its FmHA loans, the County Commissioners approved and granted the deannexation. The matter is now on appeal, and the subject of a federal suit pending in U.S. Federal District Court - Eastern District of Oklahoma (Muskogee). Invading a water district is not without risk. In the recent 1996 decision of North Alamo Water Supply Corporation v. City of San Juan, Texas, 90 F.3d 910, (5th Cir.1996), the Court held "the service area of a federally indebted water association is sacrosanct" - "the law gives the Utility (water district) the exclusive right to provide water service to and within the disputed areas." The court ordered the facilities constructed inside the water district's territory surrendered to the water district for the reasons stated by the Court: "The infrastructures are indispensable to providing water service to the residents of the subdivision now that the development is complete. Thus, unless the infrastructures are transferred, the Utility (water district) would not be able to provide efficient and economical water service, and the rights of the Utility that are validated here would be useless". 1926(b) is a powerful tool, designed to preserve and protect rural water districts. The U.S. Congress intended the statute to promote a safe and reliable water supply, at a reasonable cost, and at the same time, help water districts pay their government loans. If 1926(b) is not actively used by water districts in Oklahoma the "evil Congress wished to avoid" will, in time be visited on every rural water resident in the form of higher costs per-user, which translates into higher water prices. Water district's who have chosen to protect their systems by "going to Court" (after lengthy efforts to settle failed) have paid a significant price in the form of legal fees. The ultimate question is whether the short term cost of protection paid now, will pale by comparison with the predicted rise in per-user cost in the future due to the loss of desirable service areas sought by neighboring municipalities. 1926(b) is a "public policy" statute. Every rural water resident should be informed of its existence and given a voice in its enforcement.