"Does Rural Water Law Damp Growth of Cities???" By Jeffrey Ball, Staff Reporter THE WALL STREET JOURNAL, October 15, 1997 A new kind of water fight is springing up around the Southeast, and it's threatening to douse economic development on the edges of dozens of small but fast growing cities. Unlike the water wars that have raged for decades in the desert metropolises of the western U.S. the conflicts bubbling up in the Southeast aren't due to any shortages. At issue here is which entity - cities or the tiny rural water districts that surround them - gets to sell the water to the subdivisions, shopping centers and factories sprouting just beyond city limits. The tug-of-war for water customers is prompting lawsuits in Alabama, North Carolina and South Carolina, and is increasing tensions in Tennessee as well. As the lawyers argue, industrial recruiters are worrying the dispute will hurt their efforts to woo new businesses. "It's encumbering growth," laments Dara Longgrear, executive director of Alabama's Tuscaloosa County Industrial Development Authority. Mr. Longgrear should be an unabashedly happy man. Four years ago, Mercedes-Benz said it would build its sport utility vehicle plant beside Vance, Ala., about 15 miles from Tuscaloosa. Local boosters predicted a rush of spinoff growth, and some of that has materialized. But there hasn't been nearly as much development adjacent to the factory, due to a skirmish between the local water districts and Tuscaloosa. Citizens' Water Service Inc. Believed at the time of the Mercedes announcement that it wasn't big enough to serve the auto maker. So the district allowed Tuscaloosa to run a water line to the factory. But it barred the city from hooking up other customers within Citizen's jurisdiction. The reason: Citizens' wanted to ensure that after upgrading its system, it, and not Tuscaloosa, would get the water fees from the businesses clamoring to build nearer to the plant. "We could invite the city of Tuscaloosa to serve this area," says Pauline Simpson, Citizens' secretary and treasurer, "but in doing that we're going to kill a little town that has the opportunity to grow," because Vance is starting to build a sewer system to serve the area around the Mercedes plant. Citizens' has a potent arrow in its quiver: a federal law that protects it and thousands of other rural water districts nationwide from cities' encroachment. The law is at the center of all the region's water-district disputes between cities and rural water districts such as Citizens'. Citizens' owes its existence to a federal program launched in the 1930s that awards low-interest loans to help rural communities install water systems to attract business. Federal officials say the communities need the loans because commercial lenders often are unwilling to bankroll them. As cities grew, Congress worried they would steal so many rural customers that the districts would default on their loans, which can stretch over 40 years. So, in 1961, Congress barred cities from taking the water customers of rural districts that haven't repaid their loans. (Today, there are $5.5 billion in federal water loans outstanding. Citizens' got its loan in 1989 and still owes most of the $1 million it borrowed.) But now, cities argue the 1961 law is blocking their natural growth. They assert some districts can afford to pay back their loans early but are dragging out repayments simply to remain eligible for the 1961 law's protection against competition from nearby cities. Because most rural districts lack the capacity to serve big industrial customers, the upshot, the cities charge, is that the districts are thwarting the very economic development Congress sought to promote. Some city officials assert the federal government isn't cracking down on such rural districts. Federal officials, however, insist they compel such districts to repay the loans early. The rural districts say the cities are trying to "cherry-pick" the districts' most populated fringes. So, without the 1961 law, they argue, the districts would lose their most profitable customers. That would drive up rates for the remaining customers, and, because the loans would still have to be paid off, it would make defaults more likely, the districts say. The rural districts are winning most of these spats. But, in July, cities scored what could be a key victory. A rural water corporation that had received a federal loan sued to block Greenville, N.C. from hooking up a water pipe to a new subdivision that the corporation argued was on its turf. A federal judge sided with the city, deciding the district had lost its federal protection, partly because it didn't have pipes capable of serving the subdivision. The rural water corporation has initiated what could become an appeal. As all this legal wrangling drags on, the fields around the Mercedes plant remain undeveloped. Businesses that might have risen near the factory have located 1.5 miles to the west, closer to Tuscaloosa and outside the Citizens' water district. That's where Mr. Longgrear's development authority built an industrial park, which houses two Mercedes suppliers, seat maker Johnson Controls Inc. And electronic-component maker Delphi Packard Electronic Systems. The area "around Mercedes would really be prime for just about anything." says Mr. Longgrear. "But serious investors are going elsewhere," so they won't have to deal with the water problem. Although businesses, including an outlet mall, plan to build beside the factory, construction has been delayed because Citizens' won't let them hook up to Tuscaloosa's water line. Ms. Simpson, the Citizens' official, insists such development could proceed soon if Tuscaloosa would just grant Vance permission to install its sewer line next to the city's Mercedes pipe. In the meantime, Citizens' can afford to wait out the dispute. "We have our federally protected area," Ms. Simpson notes, "and thank God for that."