The U.S. Court of Appeals – Fifth Circuit’s Sea Change Opinion Regarding the Scope of Federal Protection of CCNs from Decertification Under 7 U.S.C. § 1926(b)

by David J. Klein and Danielle N. Lam

For many years, we have been reporting and updating our readers on the ever-changing landscape of the regulation of water and sewer certificates of convenience and necessity (“CCN”) in Texas. Typically, these updates arise from events at the Texas Legislature, the Public Utility Commission, Texas state courts, and for a period of time, the Texas Commission on Environmental Quality. However, on August 7, 2020, the triggering event came from the United States Court of Appeals-Fifth Circuit, with its en banc Opinion in the case of Green Valley Special Utility District v. City of Schertz, et al., 969 F.3d 460 (5th Cir. 2020). In this case, the Fifth Circuit overturned its precedent set in 1996 in North Alamo Water Supply Corporation v. City of San Juan, 90 F.3d 910 (5th Cir. 1996)(per curium) regarding the scope of protection afforded to federal debtors under 7 U.S.C. § 1926(b) when another party has tried to decertify some or all of its water or sewer CCN boundary. Said another way, this new precedent addressed the criteria for when a third party could decertify some or all of a water or sewer CCN possessed by an entity that has obtained a loan from the United States Department of Agriculture – Rural Utilities Division (“USDA-RUD”).
The Texas Legislature has established laws in Chapter 13 of the Texas Water Code to regulate CCNs, and the PUC has adopted regulations implementing such laws. CCNs are permits granted by the Public Utility Commission (“PUC”) that provide their holders with the exclusive right and obligation to provide continuous and adequate retail water and/or sewer service within a specific geographic area. That being said, a CCN is not a vested right and is subject to being decertificated in accordance with applicable Texas laws and regulations. Generally speaking, retail water or sewer service is provided when a service provider is furnishing water or sewer service to the end-user customer for compensation. See Texas Water Code § 13.002(20)(defining retail water or sewer service).

Typically, a service provider files an application at the PUC to obtain a new CCN, transfer an existing CCN to/from another entity, or either expand or reduce its existing CCN. Additionally, a landowner or other retail public utility can file an application at the PUC to decertify another entity’s CCN, in part or in whole.

Many retail water and sewer service providers obtain loans to pay for the costs to construct new facilities or replace aging infrastructure to meet the needs of their present and future customers. Such loans can come from many private or public sources. One of those public lenders is the USDA-RUD; loans that originate from the USDA-RUD are subject to the provisions of 7 U.S.C. § 1926(b), which provides in part that “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 . . . .”

There has been an abundance of litigation for decades, throughout the United States, on determining when service is “provided or made available” under 7 U.S.C. § 1926(b). This law and analysis is usually pertinent when a third party files an application to decertify a CCN holder that has federal debt. Prior to this Green Valley case, the Fifth Circuit held in North Alamo that the possession of a CCN gives a utility the exclusive right to serve the area within its CCN boundary and an obligation to serve every consumer within that area and render continuous and adequate service; this state law duty to provide service was seen as the legal equivalent of “making service available” under § 1926(b).

In Green Valley, the City of Schertz filed an application under Texas Water Code § 13.255 at the PUC to decertify approximately 405 acres of Green Valley Special Utility District’s (“GVSUD”) sewer CCN area that overlapped with the corporate limits of the City. In addition to the litigation arising at the PUC regarding the CCN decertification application, GVSUD also filed a complaint in federal district court in part to challenge the ability of the PUC to decertify its sewer CCN, in light of 7 U.S.C. § 1926(b), since GVSUD had an existing loan with the USDA-RUS for water system improvements. Schertz filed a Motion to Dismiss GVSUD’s complaint, and the district court denied that Motion, based in part on the then current Fifth Circuit precedent from the North Alamo case.

Schertz appealed that decision to the U.S. Court of Appeals – Fifth Circuit, and it requested an en banc hearing – a request that is rarely granted. In particular, Fifth Circuit Rule 35.1, entitled “Caution, ” provides that, “…en banc hearing or rehearing is not favored.” In any event, the en banc hearing request was granted– meaning, that the case would be heard by all active judges of the court plus any senior judge of the court who participated in the panel decision who elects to participate in the en banc consideration, as opposed to the usual three-judge panel.

Ultimately, the Fifth Circuit’s Opinion in this case overruled the decades-old precedent in North Alamo and established a new test for determining whether service has been “provided or made available” for purposes of § 1926(b) protection from CCN decertification. Looking at the ordinary meaning of the words, the court concluded that “inherent in the concept of providing service or making service available is the capability of providing service, or, at a minimum, of providing service within a reasonable time.” Therefore, it created a new test requiring a CCN holder and § 1926(b) claimant to show it has: (1) adequate facilities to provide service to the area within a reasonable time after a request for service is made; and (2) the legal right to provide service. The court noted that what makes a facility “adequate” or a time lag “reasonable” will be fact specific. The court did not clarify “exactly what facilities are necessary or precisely how nearby they must be located,” simply holding that “the utility must have something in place to merit § 1926(b) protection.” With that holding, the Fifth Circuit remanded this case back to the district court to determine whether GVSUD has satisfied this physical capability test.

Thus, this decision has created a new standard for evaluating the scope of protection under 7 U.S.C. § 1926(b), and the scope of protection is certainly more limited than the protection afforded under the prior precedent in the North Alamo case. We will continue to monitor this case and others in the state to ascertain how this new precedent will be applied.

David Klein is a Principal and Danielle Lam is a to-be-licensed Associate in the Firm’s Water and Districts Practice Groups. If you would like additional information on CCNs or have questions related to this article, please contact David at 512.322.5818 or dklein@lglawfirm.com, or Danielle at 512.322.5810 or dlam@lglawfirm.com.