by Gary Taylor
Federal 7th Circuit Court of Appeals, August 8, 2023
The Agriculture Act of 1961 authorized the United States Department of Agriculture (USDA) to provide loans to rural water associations to decrease the cost and ensure an adequate supply of safe water for farmers and other rural residents. To ensure that these associations could repay their loans, Congress enacted 7 U.S.C. § 1926(b), which prohibits municipalities and others from selling water in an area that a USDA-indebted rural water association has “provided or made available” its service. To be entitled to protection under § 1926(b), the rural water association must have the physical capability to provide service to the disputed area and a legal right to do so under state law.
Washington County Water Company (WCWC) is a rural water association that sells potable water to several counties in southern Illinois. The Village of Coulterville is adjacent to these counties. In 2019, due to the deteriorating state of its water treatment facility, Coulterville explored the possibility of buying water from either WCWC or the City of Sparta. Coulterville ultimately decided to buy water from Sparta because it was not convinced that WCWC could provide enough water to satisfy its residents’ demands. When WCWC learned of this decision, it filed a complaint in federal district court alleging that § 1926(b) prohibited Sparta from selling water to Coulterville because WCWC had “made its service available” to Coulterville. The district court granted summary judgment in favor of Sparta, holding that WCWC was not entitled to § 1926(b) protection because WCWC did not have a legal entitlement to provide water to Coulterville under Illinois state law. WCWC appealed to the Seventh Circuit.
Because the Seventh Circuit had not explicitly addressed the question of how to determine when an association has “provided or made available” service to a certain area, it looked to other federal circuits’ opinions. Every other circuit has adopted some variation of the “physical capability” test: a two-pronged test that asks (1) whether the association had “water pipes either within or adjacent to the disputed area before the allegedly encroaching association begins providing service to customers in the disputed area,” and (2) whether the association has the “legal right under state law to provide water to the disputed area. In this case the Seventh Circuit focused on the “legal right under state law” question. The Illinois Environmental Protection Agency (IEPA) – the state agency regulating water service – mandates that a water service provider’s system “must be designed to produce at least 20 percent greater than [its] maximum average daily demand ….” in order to establish a right to provide service to a given area. The district court calculated WCWC’s maximum average daily demand to be 1,608,297 gallons per day. After adding the required 20 percent reserve WCWC needed to be “designed to produce” at least 1,929,956 gallons per day, and the district court concluded WCWC could not meet this standard.
The case eventually turned on the meaning of “designed to produce” under Illinois administrative regulations. The Seventh Circuit concluded that “designed to produce” must refer to the water association’s ability to furnish sufficient water to residents, whether it treats its own water or purchases it from others. For WCWC, this meant that the Court looked at its pumping capacity as limited by its contractual capacity, “after all, WCWC cannot pump what it cannot buy.” To interpret “designed to produce” as referring only to pumping capacity, a water association would be entitled to § 1926(b) protection even if they cannot purchase sufficient water to pump through those systems to meet demand. After reviewing the parties’ disagreements about WCWC’s pumping and contractual capacities, the Court concluded that WCWC could not meet the “20 percent greater than [its] maximum average daily demand” requirement. In doing so the Court dismissed WCWC’s contention that it could buy more water from its contractual suppliers within a reasonable time because WCWC provided no tangible evidence of this during discovery.