Place the water, milk, and butter in a microwave safe bowl or measuring cup and microwave on low for 45-60 seconds.
Add all the dough ingredients, except the chocolate chips, to a large mixing bowl or to the bucket of your bread machine, and knead. This dough is difficult to to knead by hand, but does well in a stand mixer or bread machine on the dough cycle. The dough will seem very wet at first, but should tighten up as it kneads. You are looking for a sticky dough that still forms a ball. It will stick to to the sides and but should still hold its shape. It is seems more like a batter, add more flour a tablespoon at a time.
When the dough is smooth and elastic, add the chocolate chips and gently knead to mix them throughout. If you are using a bread machine, this means you will need to pay attention to the timer and add them when about 3 minutes remain on the knead cycle. (If you are using a bread machine, skip ahead to step 5 once the machine beeps.)
Transfer the dough to a clean, lightly oiled bowl. Cover and allow to rise 1 hour at warm room temperature, until doubled in bulk.
Turn out onto a countertop or cutting board and divide into eighteen pieces. Gently shape into round balls. If the dough sticks to your hands, try spraying your hands with cooking spray. Place the rolls on a parchment lined baking sheet. They will all fit on one sheet and will be relatively close together. Brush with beaten egg and sprinkle with sparkling sugar. Cover with heavily greased plastic wrap and allow to to rise at warm room temperature for 45 minutes. Towards the end of the rising time, preheat oven to 400 with the rack in the center.
Bake for 15-17 minutes until the rolls are very golden brown. They will rise and touch each other to create soft, pull apart rolls. Remove from the oven and allow to cool on wire rack. Best served immediately while slightly warm.