No Express Pre-emption: Fifth Circuit Clarifies the Reach of 7 U.S.C. § 1926(b) vis-à-vis Texas Water Code § 13.2541

I. Introduction

Crystal Clear Special Utility District (Crystal Clear) sought to prevent the Texas Public Utility Commission (PUC) from carving a 668-acre development—River Bend Ranch—out of its exclusive service territory. The suit raised a recurrent but unsettled question: How far does 7 U.S.C. § 1926(b)—the federal statute protecting federally-indebted rural water providers—pre-empt state mechanisms that allow landowners to obtain “expedited release” from a certificate of convenience and necessity (CCN)?

In Crystal Clear v. HK Baugh Ranch the U.S. Court of Appeals for the Fifth Circuit (1) reaffirmed that the “physical ability” test from its 2020 en banc decision Green Valley governs the threshold question whether § 1926(b) protections attach; (2) held that § 1926(b) does not expressly pre-empt Texas Water Code § 13.2541; and (3) remanded for the district court to decide, in the first instance, whether conflict pre-emption applies and to reassess the remaining preliminary-injunction factors. The panel kept the injunction in place to preserve the status quo.

II. Summary of the Judgment

• Physical ability confirmed. The Fifth Circuit agreed that Crystal Clear is likely able to serve River Bend Ranch within a reasonable time and therefore meets Green Valley’s first prong.
• No express pre-emption. The district court erred in finding § 1926(b) “likely” expressly to pre-empt § 13.2541. The statute contains no text expressly displacing state law.
• Limited remand. Because the district court skipped a proper conflict-pre-emption analysis and leap-frogged the remaining injunction factors, the case is remanded with instructions. The preliminary injunction stands pendente lite, and the appellate panel retains jurisdiction.

III. Detailed Analysis

A. Precedents Cited and Their Influence

1. Green Valley Special Utility Dist. v. City of Schertz, 969 F.3d 460 (5th Cir. 2020) (en banc)
   • Created the “physical ability” two-prong test: (i) adequate facilities within a reasonable time; (ii) legal right to serve.
   • Disapproved earlier “state-law duty” approach from North Alamo (1996).
   • Foundation for the district court’s and the panel’s analysis of Crystal Clear’s capability.
2. Dobbin Plantersville Water Supply Corp. v. Lake, 108 F.4th 320 (5th Cir. 2024)
   • Reiterated Green Valley; clarified Ex parte Young limits when PUC has already decertified territory.
   • Warned that once the PUC issues a final decertification order, the rural utility may lack a prospective remedy — hence the Fifth Circuit’s insistence on preserving the status quo in the present case.
3. City of Madison v. Bear Creek Water Ass’n, 816 F.2d 1057 (5th Cir. 1987)
   • Early Fifth Circuit statement that § 1926(b) bars municipal “encroachment” on federally-indebted water associations.
4. Out-of-Circuit persuasive authorities on “excessive cost” (Lebanon, 8th Cir.; Wilson, 10th Cir.; Deer Creek, 10th Cir.) were invoked by HK Baugh to argue constructive denial of service, but the Fifth Circuit declined to decide whether cost reasonableness is formally part of the Green-Valley test.
5. Pre-emption framework cases (Altria, Medtronic, Gade) guided the panel’s express/field/conflict taxonomy.

B. The Court’s Legal Reasoning

1. Application of the “Physical Ability” Test
   The panel examined two facts:
   • Pipes in the ground: Crystal Clear already has two active meters and infrastructure adjacent to River Bend Ranch.
   • Reasonable time: 0–450 living-unit equivalents (LUEs) can be served immediately; full build-out (1,800 LUEs) within 18–24 months is not per se unreasonable for undeveloped land.
   HK Baugh’s contention that Crystal Clear’s service would cost ≈ $25 million more than San Marcos’ service was left for possible factual development on remand.
2. Rejecting Express Pre-emption
   The district court had collapsed its entire injunction analysis into a single premise: “§ 1926(b) expressly pre-empts § 13.2541.” The Fifth Circuit corrected the categorisation:
   • § 1926(b) contains no clause expressly barring state law.
   • Therefore any pre-emption can only be implied: conflict or (unlikely) field.
3. Conflict-Pre-emption Question Reserved
   Whether § 13.2541 poses an “obstacle” to Congress’s objectives in § 1926(b) remains open. The panel noted the “difficult federalism question” flagged but never resolved in North Alamo and later bypassed in Green Valley. Because the district court supplied no record-based conflict analysis, the matter was remanded.
4. Procedural Posture and the Status Quo
   Guided by Dobbin, the panel maintained the injunction to avoid mooting Crystal Clear’s claim; if the PUC were free to decertify during remand, the only remedy left might be a retrospective order invalidating a final state action, barred by sovereign-immunity principles.

C. Potential Impact of the Judgment

• Pre-emption Litigation Roadmap. Rural utilities can no longer cite § 1926(b) for automatic pre-emption of state decertification statutes; they must plead and prove conflict pre-emption.
• Greater Role for Cost Evidence. Because the Fifth Circuit left the “excessive-cost” theory open, future litigants may develop a cost-reasonableness record to show constructive denial of service.
• Strategic Timing. Providers must sue before a PUC final order issues, or risk the remedial bar illustrated in Dobbin.
• Guidance for the PUC and Similar Agencies. The decision signals that state regulators are not ipso facto prohibited from altering CCNs during a federal loan, but their actions may be enjoined if they create a direct conflict with § 1926(b)’s non-curtailment mandate.
• National Persuasiveness. Other circuits wrestling with rural-utility protections may look to the Fifth Circuit’s emphasis on textual limits and proper pre-emption taxonomy.

IV. Complex Concepts Simplified

Certificate of Convenience and Necessity (CCN)

A state-issued franchise granting a utility the exclusive right—and concomitant duty—to serve a defined geographic area.

7 U.S.C. § 1926(b)

Congressional shield that prevents municipalities or other “public bodies” from “curtailing or limiting” service “provided or made available” by rural water associations that owe USDA loans.

Physical Ability Test

An evidentiary standard set by Green Valley; requires (1) adequate, proximate infrastructure capable of serving the area within a “reasonable” period and (2) a legal entitlement to serve (typically via a CCN).

Express vs. Conflict Pre-emption

Express: Congress uses clear language to displace state law. Conflict: State law is void because it is impossible to comply with both regimes or because the state statute frustrates federal objectives—even though Congress did not say so expressly.

Ex parte Young Doctrine

Allows suits against state officials for prospective relief to stop ongoing violations of federal law; does not allow retrospective invalidation of completed state actions.

V. Conclusion

The Fifth Circuit’s opinion in Crystal Clear v. HK Baugh Ranch advances federal-state utility jurisprudence in two ways. First, it solidifies Green Valley as the governing lens through which § 1926(b) attachment is judged. Second, and more prominently, it rebukes the tendency to label § 1926(b) an express trump card over state decertification statutes. Instead, courts must conduct a meticulous conflict-pre-emption inquiry—one that respects both Congress’s goal of safeguarding USDA’s collateral and the states’ historic dominion over water service regulation.

For practitioners, the decision underscores the importance of a robust factual record on (i) infrastructure readiness, (ii) timing, and (iii) comparative cost, while inviting sophisticated briefing on federalism and Supremacy Clause interplay. Legislatures and regulators, in turn, receive notice that carefully crafted state release procedures may coexist with federal loan protections—so long as they do not, in practice, curtail or limit service already “provided or made available.”

Whether § 13.2541 survives under a conflict-pre-emption analysis remains to be seen. That answer, now entrusted to the district court, will carry significant implications for rural infrastructure finance and for developers seeking alternative, cheaper utility service. For the moment, the rule is clear: § 1926(b) is powerful, but not omnipotent, and the battleground is conflict—not express—pre-emption.