City Attorneys Conference

City Attorneys Conference March 20, 2003

Water and Sewer Extensions After Annexation: Issues

David Lawrence, Institute of Government

I – Voluntary Annexations

The city has received a request to satellite annex a parcel of property 1.4 miles from the primary city limits. There are no city water or sewer lines extending from the city limits in the direction of the proposed satellite area, and the city is concerned about its responsibilities for providing utilities to this area. Is the city under an obligation to extend utilities to the satellite area if the area is annexed?

G.S. 160A-58.3. From and after the effective date of the annexation ordinance, the annexed area and its citizens and property . . . are entitled to the same privileges and benefits as other parts of the city. [G.S. 160A-31(e), for contiguous annexations, is identical.]

1. The basic rule, articulated in a number of cases from other states, is that public authorities have discretion in determining whether and where to extend water and sewer lines within a city. There is no absolute duty to extend utility lines to all properties in the city simply because the properties are within the city. Three cases illustrate this rule.

Lawrence v. Richards, 88 A. 92 (Me. 1913). In 1903 the Maine legislature created the Gardiner Water District, with a territory about 6 miles long and about 1.5 miles wide. The district’s primary purpose was to purchase an existing private water system that provided service only in the more congested parts of the district, an area about 1 mile in diameter, and that purpose was carried out. The plaintiff lived at some distance from the water system but within the district, and he demanded that the district extend lines to his property. The district refused, and plaintiff brought suit for force the extension. The plaintiff’s position was that the district’s trustees had no discretion in this matter but were under a duty to extend district lines to all properties in the district. The Maine court disagreed, saying the following: If [the plaintiff’s] contention has real merit, the consequence is that the trustees, acting for the district, are legally bound to supply water to all inhabitants, no matter how large the cost of the undertaking, now [sic] how small the revenue, no matter how ruinous and destructive the result might be to the financial ability of the district to carry on its operations. That this contention is not sound is, we think, easily demonstrable. The area of the district [in which plaintiff lives] is scatteringly settled. The elevation in some places is considerably higher than the system’s reservoir. It does not need the testimony of expert engineers to satisfy a reasoning mind that under such conditions the expense necessarily to be incurred in performing the duty, as it is claimed to be, of supplying every inhabitant of the district with water would practically be destructive of the purposes of the charter. It would create a burden too heavy to be borne. . . . We think then that the contention that as a matter of law every individual in the district has the right to have the water brought to him cannot be sustained. But if the district is not in law bound to supply all, who is to determine to what extent the system shall be expended, and who shall thereby be supplied? The power to do this must necessarily be vested in the trustees.

Rose v. Plymouth Town, 173 P.2d 285 (Utah 1946). The small municipal defendant had been incorporated a few years earlier for the sole purpose of obtaining a federal loan and constructing a water system. After incorporation the town’s voters approved two bond issues, the town obtained the loan, and the town constructed the water system. The system extended to every home within the town except plaintiff’s. He therefore brought suit to force the town to extend lines to his home as well. It appears from the opinion that plaintiff’s property was among the most valuable in the town and that he paid a substantial portion of town taxes. Despite that, the Utah court, using language very much like that used by the Maine court more than 30 years earlier, held that the town was not under any duty to extend the lines; rather, whether to extend lines was a matter within the discretion of the town officials.

City of Greenwood v. Provine, 108 So. 284 (Miss. 1926). The city’s original water system served all its residents when built, but the system had not been extended to all properties in a subsequent annexation area. The plaintiff owned a house in that annexation area, some two city blocks (700 feet) from the nearest water line, and he brought an action to require the city to extend a line to his house. He argued that he was entitled to the water line simply because his property was now within the city. The Mississippi court disagreed, making the following comments: Certainly it is not the law that a resident of a municipality, living in a remote corner thereof, may compel the city authorities to extend its water mains to his premises regardless of the cost and expense to the city, merely because the citizen resides within the boundaries of the municipality. The extension of the water system from one part of the city where already laid to another part depends upon the reasonableness of such extension, considering the demand for it, the number of water subscribers, and the revenue to be obtained from furnishing the water.

2. Although no North Carolina cases are directly in point, two cases do suggest that the North Carolina courts would agree with this national body of law. Town of Dunn v. Tew, 219 N.C. 286, 13 S.E.2d 536 (1941). The town was seeking to enforce a tax lien against property owned by defendants. The property had been annexed several years before, and the defendants made two arguments against their liability for the town’s tax: (1) there had been no voter approval of the annexation (which had been accomplished by act of the General Assembly), and (2) that the town had not extended town services to their property. The court dealt at relative length with the first issue, holding voter approval was not necessary. On the second issue, the court simply said that these “other matters complained of by defendants as to improvements in the section, were in the sound discretion of plaintiff, the municipality.”

Ramsey v. Rollins, 246 N.C. 647, 100 S.E.2d 55 (1957). The plaintiff sought to stop the county from issuing bonds to construct a water distribution system that would serve some parts but not all of the county. The plaintiff argued that using tax money to support such a system deprived those county citizens not on the water system of both due process and equal protection. The court rejected both arguments, citing cases from other states that upheld counties’ ability to levy taxes throughout the county and use the tax proceeds to provide utility services to only a portion of the county.

3. The out-of-state cases discussed above and others that are comparable set out the following sorts of considerations that a city may legitimately rely upon in deciding whether to extend water or sewer service to a particular property within the city’s boundaries. - The cost of making the extension. - The prospective revenues from the extension. - Whether there are current customers along the extended line. - Prospective growth along the extended line. - The city’s supply of water. - Whether the property owner will pay the cost of extension.

4. It is clear that a city may have a policy that requires owners of property at some specified distance from existing utility lines to pay the cost of extending those lines to their property. [E.g., Wolff v. Louisville Water Co., 302 S.W.2d 104 (Ky. 1957); State ex rel. Kennedy v. Public Service Comm’n, 42 S.W.2d 349 (Mo. 1931).] If a city has such a policy, it may certainly enforce that policy within a voluntary annexation area, but it may also be that if a property owner is willing to pay the cost that the city will be under a duty to make the extension. [See Rose v. Plymouth Town, 173 P.2d 285 (Utah 1946).] Therefore, it is a good idea to have an extension policy in place. II – USDA Loans to Rural Associations

A. The city has completed an involuntary annexation into an area that already has water service, provided by a county water and sewer district. May the city rely on the district as the provider of water service after annexation? B. Same facts, but it turns out that the water system’s lines are inadequate for fire protection. May the city install parallel lines and invite newly annexed properties to connect to the city’s system.

G.S. 162A-93 establishes the following principles when a city annexes territory within a county water and sewer district, and the district provides water or sewer services to the area. 1. Unless the district’s governing board (which is the board of county commissioners) consents, the city may not install or operate utility lines that duplicate those of the district nor require property owners in the annexed area to connect to city-owned lines. In these circumstances the district’s system satisfies the city’s legal responsibility for providing that utility service. 2. If the district’s system does not operate with sufficient pressure to provide adequate fire flow, the first principle does not apply. The city may install parallel water lines and apparently may mandate that property owners connect to the lines. (The prohibition on mandating connection appears in G.S. 162A- 93(a), and the exception for providing adequate fire flow expressly exempts a city from all the provisions of that subsection.)

7 U.S.C. § 1926(a)(1) authorizes the U.S. Secretary of Agriculture to make rural water or sewer system loans to “associations, including corporations not operated for profit, Indian tribes on Federal and State reservations and other federally recognized Indian tribes, and public and quasi-public agencies.”

7 U.S.C. § 1926(b) provides: The service provided or made available through any such association shall not be curtailed or limited by inclusion of the area served by such association within the boundaries of any municipal corporation or other public body, or by the granting of any private franchise for similar service within such area during the term of such loan; nor shall the happening of any such event be the basis of requiring such association to secure any franchise, license, or permit as a condition to continuing to serve the area served by the association at the time of the occurrence of such event.

1. If a city annexes into an area served by a protected association, the city may not extend its own utility lines into the area if the effect of doing so is to curtail or limit the protected services of the association. This creates at least two potential problems for a North Carolina city. Fire protection. The city may not be able to provide adequate fire protection through the lines of the protected association. The federal courts have made clear that the purpose of the federal loan program is to extend domestic water or sewer service to rural areas; it is not to extend to those areas water service sufficient for fire protection. As a result, in a number of reported decisions the association’s lines did not supply sufficient fire flow to provide organized fire protection.1 If a North Carolina city were to find itself in such a situation, it would still be responsible for providing sufficient fire flow in the annexation area, even when it could not use the necessary water lines to provide domestic water service to the area.2 Rate differentials. The rate structure of the rural system may result in annexed property owners paying significantly higher rates for water or sewer service than the rates charged by the city. (Such a rate differential is not sufficient reason to deny to the rural association the protection of the federal statute.3) If that is the case, particularly in an involuntary annexation, the city will have to take steps to assure that the annexed property owners end up paying water or sewer charges comparable to those paid by the city’s own customers.4 If either of the above problems affects a given annexation, the annexing city will almost certainly find it necessary to attempt to negotiate some kind of solution with the protected rural association. A city might be able to work out an arrangement under which the association waives its rights to particular customers, or it may need to negotiate a purchase of some or all of the association’s assets. If these negotiations are unsuccessful, the city may need to run its own water lines in order to provide adequate fire flow for fire protection; or it may need to in some fashion subsidize the water and sewer rates of the rural association, so that customers inside the city receive utility service at rates comparable to city rates.

2. In order for a rural utility association to qualify for the protections of the federal statute, it must meet three tests: - It must be an association within the meaning of the statute. - It must have outstanding obligations on loans made to it by FmHA or RUS. - It must have provided or made service available to the customers or area in dispute.

1 Rural Water Dist. No. 1, Ellsworth County, Kansas v. City of Ellsworth, 995 F.Supp. 1164 (D. Kan. 1997); Rural Water System No. 1 v. City of Sioux Center, 29 F.Supp.2d 975 (N.D. Iowa 1998). 2 See, Water Works Dist. No. II of Tangipahoa Parish v. City of Hammond, No. 86-0187, 1989 U.S. Dist. LEXIS 11752 (E.D. La. 1989). 3 Rural Water Dist. No. 1, Ellsworth County, Kansas v. City of Ellsworth, 995 F.Supp. 1164 (D. Kan. 1997). 4 In Bowers v. City of Thomasville, No. COA97-1391, filed 1 December 1998 (N.C. Court of Appeals, unpublished), the court held that relying on a private water company with significantly higher rates than the city’s rates did not meet the substantially equal service requirements of the involuntary annexation statutes. 3. Although one reading of the statute might lead a person to think otherwise, if an entity has been loaned money by FmHA or RUS for a water or sewer system, it meets the first test: it is an association within the meaning of the statute. The federal courts have extended the protections of the statute to private associations, towns, various special districts, and counties. The second test is also readily ascertainable.

4. As to whether the association has made service available, the Fourth Circuit has accepted the pipes-in-the-ground standard, as has each other federal circuit that has addressed the issue.5 Stated simply, this standard finds that a protected association has made service available to a specific property if the association has lines sufficiently close to the property that it can extend service to the property within a reasonable time. There are several elements to this standard.

First, the association’s lines must be close enough to the disputed property so that service can be extended to the property within a reasonable time. Some courts seem to look specifically at distances between association lines and the subject property, while others seem more interested in the time it would take to extend service to a particular property from the association’s existing lines than in the lines’ linear distance from the property. It may be that the Fourth Circuit takes the latter approach. In the Bell Arthur case the water corporation had a six-inch water main running through the proposed development in dispute but acknowledged that a fourteen-inch line was necessary to serve the development adequately. The court seemed willing to give the corporation several months to get the permits and financing necessary to extend the larger line, but the corporation’s complete inaction caused it to forfeit whatever rights it might have had.6 Second, the service made available by the protected association must be adequate to the needs of the disputed customer. As was noted just above, an association’s six-inch line through a disputed property did not itself meet the third test when the property required a twelve- or fourteen-inch line. The association was required to extend the necessary level of service within a reasonable time. It is clear, however, that merely because an association does not have an adequate line in place at present does not mean it has not made service available. The Fourth Circuit was willing to give the water corporation in Bell Arthur some months to construct the line necessary to service. If the association provides adequate water for domestic purposes, moreover, its failure to provide sufficient fire flow for fire protection is irrelevant. The federal program is intended to provide domestic water to rural communities, not fire protection,

5 Bell Arthur Water Corporation v. Greenville Utilities Commission, 173 F.3d 517 (4th Cir. 1999). See also North Alamo Water Supply Corp. v. City of San Juan, Texas, 90 F.3d 910 (5th Cir. 1996); Lexington-South Elkhorn Water Dist. v. City of Wilmore, Kentucky, 93 F.3d 230 (6th Cir. 1996); Sequoyah County Rural Water Dist. No. 2 v. Town of Muldrow, 191 F.3d 1192 (10th Cir. 1999). 6 “We hold that Bell Arthur’s inadequate six-inch pipe in the ground coupled with only a general, unfulfilled intent to provide the necessary 14-inch pipe sometime in the future does not amount to ‘service provided or made available.’ Bell Arthur Water Corp. v. Greenville Utilities Comm’n, 173 F.3d 517, 526 (4th Cir. 1999). and so an association’s failure to provide sufficient fire flow for fire protection does not cause it to lose the protections of Section 1926(b).7 Third, any differential in rates between the protected association and a potential competitor is irrelevant. A number of cases have involved associations that charged higher rates than the competing city, and the courts have consistently refused to allow that fact to undermine the association’s position under Section 1926(b).8 Finally, the preferences of an individual customer are irrelevant to whether a protected association is entitled to serve that customer.9

7 Rural Water Dist. No. 1, Ellsworth County, Kansas v. City of Ellsworth, 995 F.Supp. 1164 (D. Kan. 1997); Rural Water System No. 1 v. City of Sioux Center, 29 F.Supp.2d 975 (N.D. Iowa 1998). 8 E.g., Rural Water Dist. No. 1, Ellsworth County, Kansas v. City of Ellsworth, 995 F.Supp. 1164 (D. Kan. 1997); Jennings Water, Inc. v. City of North Vernon, Indiana, 682 F.Supp. 421 (S.D. Ind. 1988); 9 E.g., Adams County Regional Water Dist. v. Village of Manchester, Ohio, 226 F.3d 513 (6th Cir. 2000) (wholesale customer not allowed to connect with alternative supplier); Jennings Water, Inc. v. City of North Vernon, Indiana, 682 F.Supp. 421 (S.D. Ind. 1988) (wholesale customer not allowed to connect with alternative supplier); Rural Water Dist. No. 1, Ellsworth County, Kansas v. City of Ellsworth, 995 F.Supp. 1164 (D. Kan. 1997) (that district is more expensive and that customer would prefer city is irrelevant to district’s protection under federal statute).