Sequoyah #7 Makes New Law

By Steven M. Harris, Doyle & Harris - Attorney - Tulsa, Oklahoma - Copyright 1999

7 U.S.C. 1926(b) is a federal statute designed to protect rural water districts from neighboring cities (or other "public bodies") selling water inside a district's territory. 1926(b) grants a federally indebted water district the exclusive right to provide water service within its service area. Recently, the U.S. Court of Appeals for the 10th Circuit issued its opinion in the case of Sequoyah County Rural Water District No. 7 v. Town of Muldrow, __F.3d__, 1999 WL 624568 (1999). Sequoyah-7 (an Oklahoma rural water district) sued the Town of Muldrow in federal court (Eastern District of Oklahoma- Muskogee) for Muldrow's violations of 1926(b) seeking damages for Muldrow's past infringing sales and an injunction to prevent future sales of water to customers located in Sequoyah-7's territory. Although Sequoyah-7 lost before the trial court, the 10th Circuit reversed the trial judge and established specific guidelines favorable to all federally indebted rural water districts.

The U.S. Congress passed 1926(b) to protect rural water districts from competition in order to encourage rural water development. The 10th Circuit in the Sequoyah-7 case confirmed that Congress intended 1926(b) to assist rural water districts in protecting their territory against competitive facilities which might be developed by the expansion of the boundaries of municipal or other public bodies into an area served by the rural system. To qualify for 1926(b) protection a water district must prove that (1) it has a continuing indebtedness to the FmHA (now Rural Utilities Service/Rural Development), and (2) have provided or made service available to the disputed area. The 10th Circuit announced a new rule, beneficial to water districts: "Doubts about whether a water association is entitled to protection from competition under 1926(b) should be resolved in favor of the FmHA-indebted party seeking protection for its territory." This provides a water district a distinct advantage in judicial proceedings, since the water district is given the benefit of any doubt as to its ability to deliver. To emphasize this important point, the 10th Circuit mentioned it twice, concluding its decision with the admonition: "...evidentiary uncertainties should be resolved in favor of Plaintiff (water district), the party seeking to protect its territory, on remand." This places a heavy burden on the encroaching city to prove that there is no doubt whether a water district can make service available within a reasonable time. Similarly, doubts regarding what is "reasonable" must be resolved in favor of the water district.

Sequoyah-7, like many other water districts originally indebted to the FmHA, bought out its loan, then later became indebted to FmHA again. The Court held that the water districts may pursue encroachment claims for all periods for which encroachment occurred or continued while the water district was indebted, but may not do so for the period when it was not indebted. The Court said: "...even if a water association has repurchased its loan and discharged its debt to the government, encroachments which occurred during the term of the loan are protected." It does not matter that the new loan was intended for a specific geographic area rather than system-wide improvements. If indebted to the federal government, 1926(b) protection exists for all areas that the water district has "made service available".

So what is meant by "making service available"? In the 10th Circuit's own words: "Inherent in the concept of providing service or making service available is the capability of providing service within a reasonable time. Bell Arthur, 173 F.3d at 526. If a water association has a legal duty to provide service but has no proximate or adequate facilities or cannot provide them within a reasonable time, it is the customer who suffers. For these reasons, we think that the second prong of 1926(b) should focus primarily on whether the water association has in fact "made service available" i.e. on whether the association has proximate and adequate "pipes in the ground" with which it has served or can serve the disputed customers within a reasonable time."

Of considerable significance is the Court's statement: "...a water association meets the "pipes-in-the-ground" test by demonstrating "that it has adequate facilities within or adjacent to the area to provide service to the area within a reasonable time after a request for service is made." (The issue turns primarily on the "timing" of when service can be made available, as opposed to a specific distance requirement measuring from the point of need to the point of existing lines.) The experience of the author in numerous suits to enforce 1926(b) rights, is the fact that rarely does a potential customer "make a request for service" but rather proceeds to negotiate/contract with a neighboring city for service, by-passing the water district entirely. The standard however will be whether the water district could have provided service within a reasonable time after a "request for service" is (or should have) been made. If so, the city will undoubtedly be deemed to have unlawfully encroached, and will pay the consequences, which may include, money damages, forfeiture of water lines, attorney fees, etc. If there is any doubt whether the water district could have provided service within a "reasonable time", that "doubt" is to be resolved in favor of the water district, according to the 10th Circuit.

Providing service to water applicants does not mean that the water district must do so at no cost to the water applicant. In Oklahoma, water districts are required to charge for services and materials. Being non-profit agencies of the State of Oklahoma, the district is solely dependent on revenue it derives from providing materials and service. Therefor it may charge a fair price for what is being demanded. Cities are no different. Cities have and do charge substantial "impact fees" on developers to cover the cost of system improvements to meet the needs of water applicants. In Rural Water District No.1, Ellsworth County, Kansas v. City of Wilson, Kansas, 29 F.Supp.2d 1238 (D. Kansas 1998) the Court concluded "The statute (1926(b)) is designed to protect associations from competition from nearby municipalities. However, this does not authorize an association to charge unreasonably high rates or fees while claiming the statute's protection. The court concludes that conditioning service on the user's agreement to pay unreasonable fees is not "making service available"." Simply stated, water district's may charge "reasonable fees" and not "unreasonable fees". What is reasonable depends on the specific needs and demands of the water applicant. It does not necessarily mean that a water district must charge something equal to or less than fees being offered by a neighboring municipality.

In the case of Sequoyah-7 v. Muldrow, the city also argued that the district was not making service available because it was unable to provide "fire protection" along with potable water service. The Court dispensed with this argument swiftly. The 10th Circuit, citing an Ohio District Court decision, noted: " 1926(b) was not enacted to supply fire protection, a water associations's capacity to provide fire protection is irrelevant to its entitlement to protection from competition under 1926(b).

The lesson here is simple. Water districts must engage in long range planning to be prepared to meet the developing needs of a growing community in a timely fashion. If they don't plan ahead, they will run the risk that they cannot meet those needs within a "reasonable time" (after a request for water is made) and will consequently lose that customer and possibly the surrounding territory to a neighboring city or a neighboring water district who is better prepared.

"Making service available" obviously involves issues such as "line size", pressure, and volume. Many water districts complain that their sole source for water is neighboring municipalities, who control the volume of water (and tap locations) in order to restrict a water district from expanding to meet the needs of its customers. Some municipalities restrict access to water in order to prevent a water district from "making service available" to a water applicant so that the city and not the water district will gain this added source of water sale revenue. Some cities also engage in the unlawful practice of refusing to provide sewer service unless the applicant also purchases water from the city. This "leverage" coerces homeowners and developers into buying water from the city and not the water district. Tying one municipal service to another to force customers into obtaining water service from a city rather than a water district (when the water district has the legal right to serve) violates state and federal antitrust laws.

In 1998 the Oklahoma Legislature decisively ended the monopoly previously enjoyed by cities over their water supply. No longer may a city "unreasonably" deny access to its water resources to either its own customers, or competitors such as adjacent water districts. The newly enacted statute ( Title 79, Oklahoma Statutes, Sections 201, 202) states that cities (and public trusts they create for the benefit of the city, such as a Municipal Utility Authority/Board) who are in control of an "essential facility" (such as water, sewer, electricity etc.) may not deny access to that essential facility "upon reasonable terms" if the effect of such denial is to injure competition. In the case of water, Oklahoma law also provides that any owner of a "works" (i.e. municipal water works) which has water in excess of its needs (which is true of many municipalities) is "required to deliver such surplus, at reasonable rates ... to the parties entitled to the use of the water for beneficial purposes". (Title 82, Oklahoma Statutes, Section 105.21) Cities may no longer "squeeze out" rural water districts from the business of selling water by holding their source of supply "hostage", unreasonably denying access except on draconian terms (usually designed to prevent rural water district expansion that would jeopardize the interests of the city). However, do not think that cities will obey either federal or state law voluntarily. If reported judicial decisions are any indicator, cities are willing to fly in the face of clearly worded statutes (and well worded judicial decisions), and spend enormous sums for legal fees in defense of their monopoly. Water revenue is precious, and it will not be given up without a fight.

Water districts who have ventured into litigation to protect their territory and revenue have universally found the fight long, fraught with political turmoil and expensive in the short run. Those that have weathered the storm, have found victory (sometimes years in the process) to be worthwhile. The key to success is careful planning, to satisfy the "making service available" requirement of the federal courts. Federal Law requires that federally indebted water districts make service available to applicants in their service areas. In honoring this federal mandate, water districts are not only complying with federal law, they are insuring their continued existence and success should litigation become necessary to protect their territory.

About the Author. Steven M. Harris and Michael D. Davis of the Tulsa, Oklahoma law firm of Doyle & Harris were the lawyers representing Sequoyah-7 in its federal litigation. Mr. Harris is the author of Legal Handbook for Oklahoma Water District Managers and Public Boards. Mr. Harris and Mr. Davis have represented numerous water districts in federal litigation to enforce 1926(b) rights. More information about the firm can be found at www.commercialaw.com. Doyle & Harris, 1350 South Boulder, Suite 700, Tulsa, OK 74119, (918) 592-1276, (fax) (918) 592-4389. E-mail: Steve.Harris@Mail.DoyleandHarris.com.