We Made It to the Merge! We are happy to say that after a very close vote the proposal to add the term “MUD” to the list of terms in the Merge process passed yesterday at a meeting of the ISO’s Technical Committee, TC 201, in Indianapolis. In that meeting, the proposal passed 26 to 18 with 2 abstentions. The vote also approved changing the way that an MUD can be merged by making the term merger subject to a majority vote. So while an individual MUD still must agree to a merger with a similar MUD for the merger to be approved by the TC 201 committee, a single individual MUD will not be able to single-handedly approve a merger, which would put the MUD at risk of being forcibly merged by the majority of the committee. Instead, the committee will have to vote a second time on each MUD merger with an affirmative vote to merge two or more MUDs, and each time with a new majority. Merger approval: An MUD in a New Mexico election, but an individual in Missouri To clarify, a MUD may be in multiple states, with more than one branch office in a single state, but must be a “Single MUD” entity (see merger requirement above). One person in one state may not be a “MUD.” If the MUD were an organization or business, it would be a LLC. Some states use different structures that MUDs use in other states. Here is the full text of the merger requirement: “(a) Merger. Each MUD must have an independent existence and must have a separate, individual existence from any other MUD. No MUD may be merged or consolidated with any other MUD; however, a MUD may elect to merge with another MUD and, once approved by the management representatives of the MUDs to be merged, such a proposed merger shall become subject to a vote by the MUD management representatives of the two merging MUDs. The vote shall be taken pursuant to sub-section A of § 3-504. A majority vote of the management representatives of each MUD must approve the merger.” More News on MUDs We’ve had many questions on what this means for the future of the MUDs, so we’ve compiled answers to some frequently asked questions below. 1) What is the current legal status of MUDs? Are they recognized by the Internal Revenue Service, etc.? MUDs are legal entities. They do not fall under the regulations of the IRS regarding nonprofit organizations because they are governed by laws of their own. As such, we believe that MUDs are good candidates to be held in non-profit trust status and that’s a topic that we’d love to discuss with our readers more in the future. Until that day comes, we offer the above reference to the Colorado attorney general’s memorandum discussing how the IRS currently understands MUDs: MUDs are not charities (IRC 501c3) or 501(c)(4) social welfare organizations, but rather are more similar to 501(c)(5) and 501(c)(6) trade organizations: The IRS applies a primary issue test in determining whether a particular organization is tax exempt. Generally, to be tax exempt, the primary purpose of an organization must be “social welfare” in nature (e.g., religion, education, or charitable), whereas MUDs have a “business purpose.” In the IRS’s view, a business purpose is not relevant to social welfare and such a primary purpose must be excluded from consideration for exemption. The above IRS memorandum states that “business purpose” is not listed as a social welfare purpose in any IRS regulations. Instead, the IRS applies the same standards to MUDs as it does to for-profit corporations, partnerships, and sole proprietorships, and an MUD does not qualify for tax exemption unless a bona fide social welfare purpose underlies the organization. 2) What do MUDs do? MUDs are non-profit corporations that provide services that might traditionally be offered by governments, including water, waste removal, electricity, sewer service, gas, transportation, and policing. They’ve also been instrumental in redefining how utilities are done, allowing MUDs to implement ideas such as public banks, the Public Power Service, and other means of providing services that were traditionally seen as outside the purview of government. Here’s a good explanation of how they’ve changed how utilities are provided: http://www.muninetworks.org/article/articles/2107 3) What are MUDs used for? MUDs are frequently used for utilities and public services, especially in rural and developing countries. They’re used to provide those services because there is a high demand for them in those areas and limited access to them. This can be seen in several examples around the world, including in Mexico and Nicaragua. MUDs are typically formed when land that is owned by a country is not yet incorporated into a municipality, so MUDs may create their own municipal government as an in-between stage between private land and public property. An example of this is the Oropeza Townsite MUD, which was created to form a temporary village until Oropeza is annexed into the City of Santa Cruz, Sonoma County, CA. MUDs provide the infrastructure that comes with municipalities like roads, sidewalks, water, electricity, and sewer systems, but the area must be planned and built by private developers who own the land. 4) What do MUDs look like? They look like this: http://media.mercurynews.com/img/2010/06/04/mercwtr-144585-6_5x7.jpg. This is not an example of an MUD. This is an example of a for-profit developer and MUD. That said, the image at the top of this article is of an MUD. You can view some examples of the layout and services provided by MUDs here. Here’s a good FAQ on MUDs and their services: http://www.mercurynews.com/business/ci_15012909 Some Other Questions Answered Have MUDs been around for years? Yes. MUDs were first used in the 1960s, especially in Alaska and the western US. Are they more cost effective than existing government services? Yes, in rural areas. There are more comprehensive reports available on this subject, but the bottom line is that they are cheaper and you don’t have to lay waste on the roads to get to them. This fact sheet describes why this is the case: http://www.publicpower.org/publications/MUD_Publication_3.pdf Do MUDs have to pay taxes? Yes, just like any for-profit business. The primary way they collect taxes is to charge the land owners the “toll” for the service that the land provides. In return, they get the right to use the land. This allows MUDs to offer services that are often not offered by the government without having to lay toll roads and maintain services that the public would be charged for. They do not pay taxes on the additional money they take in because most are operated as non-profit entities. Why does no one know about MUDs? Most people don’t know about them because MUDs have never actively marketed themselves. But MUDs have found success in areas where they have been around for years. In the past, it’s not the government but companies who’ve been responsible for providing utilities in rural areas. They’ve offered electricity, gas, water, sewer, and cable television service. MUDs have become popular in the last ten years because they’re cheaper than governments and deliver better service, allowing citizens to access their land without first having to visit a government office. Are MUDs a solution to the rising cost of energy? No. MUDs typically receive a one time payment from the residents in the areas they serve to compensate them for the cost of their utilities. Their profit is generated from an additional charge levied on the land and any utilities are included in the rates set by their governing MUD. When costs and benefits are balanced, however, many MUDs have lower rates than many city utilities. How do MUDs work? They’re like a business. There are many of them. Some are nonprofit and some are for-profit. All offer services that may be offered by government or a utility provider, including electric, gas, water, sewer, or road maintenance. There’s no one way in which MUDs operate. Each MUD has its own way of doing things, but all MUDs are governed by a management committee that sets their goals and establishes processes to achieve them.