Friday, March 13, 2009

Kansas federal court provides guidance on key rural water district issues

In a decision entered on March 9, 2009, the U.S. District Court for the District of Kansas weighed in on several hot-button issues impacting water providers in Kansas, Oklahoma, and throughout the country.  The case involves a dispute between a Kansas rural water district and the neighboring City of Eudora, Kansas.  The rural water district alleges encroachment by the City, claiming violation of the rural water district's territorial monopoly under 7 U.S.C. § 1926(b).  The City has resisted the monopoly claims through several key defenses.  The Eudora Court's March 9, 2009 decision will likely be cited many times on at least a couple of these issues.

First, the Eudora Court rejected the City's argument that the water needs for fire protection should be considered as part of the made-service-available test under Section 1926(b).  Among other things, the Court rejected the argument that fire protection is relevant because federal regulations require rural water districts to provide fire-protection.  Thus, although not mentioned in the March 9, 2009 decision, the Eudora Court disagreed with an unpublished decision on the same issue from the U.S. District Court for the Western District of Oklahoma.  Notably, this blog has described the argument based upon federal regulations requiring fire protection as early as 2006.

Second, the Eudora Court addressed the latest version of an argument that has been raised in a number of courts lately -- whether a state-created rural water district holds the authority to use federal law to create a monopoly power over other state entities.  This argument has appeared in this blog as early as 2005 and is the subject of litigation described here several times.  The City of Eudora applied an interesting and unique take on this argument, arguing that the narrow purposes of Kansas rural water districts prevent a rural water district from borrowing and maintaining a USDA loan for the sole purpose of creating a monopoly.  In an important and seminal development in rural water district litigation, the Eudora Court agreed, holding as follows:

Here, the Court finds that the stated goals of the statute are not accomplished where the loan guaranty is done solely for § 1926(b) protection. To be sure, monopoly protection in and of itself does nothing for "public health, convenience and welfare;" rather, it seeks only to protect the water district from competition, which in most instances is better for the public health and welfare. In this instance, the public is not benefitting from lower consumer prices that are inherent in competitive utilities. Furthermore, unlike other utilities that are regulated by the state and restricted to certain fees, a rural water district, such as this, with monopoly protection is essentially free to price at any rate.
Based upon this critical ruling, the Eudora Court determined that the case must proceed to trial on, among other things, the fact issue of "whether the loan guaranty agreement was entered solely for § 1926(b) monopoly protection."  We will be watching for further developments in this key case.