Kelly v. Teton Prairie LLC, 376 P.3d 143 (Mont. 2016) (holding: (i) the district court properly applied the prior appropriation doctrine against a junior rights holder who failed to adhere to a call for water; (ii) the junior water right holder failed to meet its burden in establishing the futile call doctrine as an affirmative defense; and (iii) the district court had proper jurisdiction and authority to grant injunctive relief to the senior water right holder).

The Teton River (“River”) flows through Teton and Chouteau Counties in Montana.  The River primarily relies on melting snowpack to maintain its late season flow and has a long history of water right disputes stemming from farming and ranching operations.  Steven Kelly (“Kelly”) was a senior appropriator who held water rights for stockwater purposes and domestic use.  Teton Prairie LLC (“Teton”) was a junior appropriator, located upstream from Kelly, and held water rights for irrigation.  In August 2013, Kelly observed that he was not receiving the full extent of his water rights.  Kelly’s attorney sent a round of call letters to junior appropriators, including Teton, instructing them to cease diversion of water from the river.  Despite the call, Teton continued to divert water.  Kelly filed suit, seeking injunctive relief in its claims of wrongful interference with a water right and wrongful diversion of water by a junior water right holder.    A Montana district court granted Kelly’s motion for summary judgment and enjoined Teton from making out-of-order diversions after the receipt of call letters from senior appropriators, such as Kelly.  Teton appealed to the Supreme Court of Montana.

The Court first considered whether Teton violated the prior appropriation doctrine.  The Court explained that the Montana Water Use Act explicitly recognized the prior appropriation doctrine.  Under the Prior Appropriation Doctrine, the first to take possession of water on the public domain and put it to beneficial use becomes the “first in right.”  The Court noted that the senior appropriator is entitled receive his full appropriation and junior appropriators must take notice of the senior’s call and stop diversions until the senior’s appropriation right was fully maximized.  The Court rejected Teton’s argument that Kelly’s call was invalid because Kelly had made calls to “selective” junior appropriators, instead of making the call based on the strict order of reverse priority.  The Court noted that when a senior water right holder’s interest is injured, any and all junior water right holders are equally answerable for the injury.  The Court concluded that senior appropriators need not follow a strict order of calls, as such a requirement would conflict with the purpose of the doctrine.  The Court upheld the district court’s finding that Teton had violated the prior appropriation doctrine by improperly ignoring a call for water by Kelly.

The Court next addressed the futile call doctrine, which is an affirmative defense for a junior right holder who elects not to honor a senior appropriator’s call.  Montana has never explicitly adopted the doctrine.  The futile call doctrine excuses a junior right holder from a call when the outcome would result in no beneficial use by the senior right holder.  The burden is on the junior right holder to show that no usable water would reach the senior appropriator’s point of diversion because of carriage loss.  The Court rejected Teton’s application of the doctrine, noting expert testimony, which revealed that usable water could have traveled to Kelly’s point of diversion had Teton ceased its diversion.

Finally, the Court addressed whether the district court’s grant of injunction was proper.  The Court noted that the district court had the jurisdiction, authority, and sound discretion to grant an injunction in water right disputes.  The Court rejected Teton’s argument that the injunction’s scope was too broad, reasoning that the district court order only required Teton to refrain from activity that would violate the prior appropriation doctrine and Montana law. Finding no instance of manifest abuse by the district court, the Court affirmed the grant of injunctive relief to Kelly.

Accordingly, the Court affirmed the judgment of the district court.

Reggie Norris

Image: A farm in Bozeman, Montana. Flickr User Tim Evanson, Creative Commons.


The Other Black Gold

Historically, water has been a nuisance in oil and gas production because companies have to transport and dispose of water that is produced along with the fuel that is pulled from the reservoir.  However, produced water became even more of a nuisance for coal bed methane (“CBM”) producers in 2009 after the Colorado Supreme Court held in Vance v. Wolfe that dewatering of a coal bed to produce methane gas was a beneficial use as defined by the Ground Water Act of 1969.  The Vance ruling made it so CBM producers have to obtain a water well permit and an augmentation plan to protect vested water rights when dewatering a coal bed to produce methane gas.

However, the Vance decision left the door open for produced water to become an asset instead of a nuisance for traditional and shale wells.  The decision clarified that the State Engineer, not the Colorado Oil and Gas Conservation Commission, has the authority to regulate produced water.  Produced water from these operations is naturally occurring brackish or brine water that was trapped in the oil reservoir.  This regulatory authority, codified in Colo. Rev. Stat. § 37-90-137(7)(c), allows the State Engineer to classify Colorado’s formations and basins, in whole or in part, as nontributary groundwater for the purpose of dewatering for mineral extraction.  In Colo. Rev. Stat. § 37-90-137(7)(a), the state legislature authorized non-CBM operators to use nontributary groundwater removed during extraction for various drilling operations within the same basin including well stimulation, well maintenance, dust control, pump operation, injection in a properly permitted disposal well, and disposal at a properly permitted commercial facility without a water well permit.

This development presents non-CBM operators with the unique opportunity to harness produced water from designated nontributary groundwater formations and basins for a variety of purposes without being subject to the state doctrine of prior appropriation.  In essence, as long as the same operator continues to use the produced water in the same basin for any of the enumerated uses above, the operator can use the water to its extinction and can transfer it without ever being subject to challenges of injury under the doctrine prior appropriation.  The ability to obtain and use water that is not subject to prior appropriation rather than lease or purchase water rights has the potential to save the oil and gas industry a substantial amount of money.  The economic impact for the oil and gas industry, as well as other industries, could be tremendous given that oil and gas operations produced more than 41,000 acre-feet of water in 2012.

The potential to use produced water for well stimulation could be a game changer in Colorado where approximately ninety-five percent of new wells are stimulated by hydraulic fracturing (“fracking”). Fracking a vertical or directional well requires between 100,000-1,000,000 gallons of water per well, while fracking a horizontal well require two to five million gallons of water per well.  Clearly, when the industry is thriving their water needs quickly increase putting added strain on Colorado’s stressed water supply.

For example, in 2012, 1500 vertical/directional wells were drilled and 1000 horizontal wells were drilled using approximately 19,947 acre-feet of water accounting for 0.13% of Colorado’s total water use.  Even if operators use a mixture of freshwater and produced water for fracking, their savings would be immense given the rising prices of water in Colorado.

Furthermore, oil and gas operations in Texas have already begun to experiment with using a mixture of brackish water and produced water in the fracking process with some success.  However, using produced water presents several challenges, because produced water contains metal salts, and can range from brackish water (which is less saline than sea water) to brine water (which is more saline than sea water).  The salt and mineral makeup of produced water reacts differently given the type of rock formation or chemicals used in the fracking fluid, which requires operators to vary formulas.  Despite the challenges and costs associated with varying formulas, the use of produced water for fracking in Colorado could save operators money, especially if they could become a self-sustaining water user, and thereby decrease demand for freshwater reducing the price for other industries around the state.

In addition to permitted drilling operation uses, non-CBM operators are also authorized to dispose of nontributary produced water without a water well permit by injection in a properly permitted disposal well, or at a properly permitted commercial facility.  Most oil and gas producers prefer to dispose of wastewater through injection wells because it is cost effective and quick.  However, environmental pushback and concerns about increased seismic activity around injection sites has made water treatment a more attractive option, which has pushed the industry to innovate and become more cost effective.  Along these same lines, the water treatment industry has been able to successfully turn even brine water into freshwater through the process of reverse osmosis, which makes recycled water a viable option for a variety of uses.

If treatment becomes even more cost effective, then recycling produced water could be an attractive venture in drought-stricken states like Colorado where oil and gas, and other water intensive industries are major economic drivers. In 2015, Colorado came in as the sixth highest producer of natural gas in the United States and the seventh highest producer of crude oil in August, 2016.  The oil and gas industry contributes over thirty-one billion dollars to the state’s economy in 2014. Colorado was also the twenty second highest agriculture producing state in 2015, and the agricultural industry in Colorado uses eighty-nine percent of consumed water.  Agriculture also contributes forty-one billion dollars to the state’s economy. Recycling produced water that could be used for agriculture could protect the industry as the state’s population grows and municipal demands grow.

The impact of using treated or desalinated water can be seen in Israel where treated sources are almost the exclusive source of water for the agricultural industry. Additionally, recycled water could be used for river recharge or as augmentation water for shallow freshwater basins.

Nevertheless, recycling produced water to be used in other industries raises questions about classification and ownership. Colo. Rev. Stat. § 37-90-137(7)(a) states that, in regard to nontributary groundwater, an operator does not need a well permit unless the produced water will be beneficially used—which recycling for future use would seem to be.  However, Colo. Rev. Stat. § 37-90-137(7)(c) allows non-CBM to dispose of water at a properly permitted commercial facility without having to obtain a well permit—which seems to label recycling of produced water as not a “beneficial use” within the definition of the Groundwater Act of 1969.  Theoretically water treatment facilities could be producing freshwater from a nontributary source that in turn could be used for a variety beneficial uses.  Thus, despite the costs of recycling the produced water, whoever owns the produced water could then sell, trade, or augment a water source with water that to that point hasn’t been subject to prior appropriation.

Ultimately, the administrative leeway encourages non-CBM producers to properly dispose of water by not imposing the costs of well permitting or augmentation plans, but also creates a situation where a new water source could be created without being subject to prior appropriation.  Even if the newly recycled water would be subject to prior appropriation upon sale or trade, the owner of the newly recycled produced water could potentially gain financially without having to obtain a water well permit to recover the water in the first place.  Therefore, mineral rights agreements between the oil and gas producer and the lessor would be critical to establish who owns the nontributary produced water. However, there is dicta in the Colorado Supreme Court case, Board of County Commissioners of County of Park v. Park County Sportsmen’s Ranch, LLP (“Park County Sportsmen’s Ranch”) that could further complicate the analysis.

Park County Sportsmen’s Ranch was a 2002 case involving a trespass claim from artificial recharge into storage space in subsurface aquifers.  In the case, the Colorado Supreme Court accepted the Ohio Supreme Court’s rationale that surface owners do not enjoy absolute ownership of waters below their land, because the water below their properties, including the native brine, are classified as waters of the state.  The Colorado Supreme Court found this distinction particularly significant to Colorado’s long standing constitutional, statutory, and jurisprudence that all water in the state is a public resource which the state decrees rights to.  Starting from the foundation that there are limitations to absolute subsurface rights, and that all water in Colorado is public including the native brine, it seems that the state, surface owner, split estate subsurface owner, and producer could all have claims to the produced water.

Ultimately, post Vance v. Wolfe rulemaking was positive in the respect that it cut administrative costs for non-CBM producers and the state by not requiring a water well permit for nontributary produced water.  The rulemaking also encourages non-CBM producers to use produced water in new ways, and incentivizes them to dispose of produced water properly.  However, the economic benefit of using produced water in new ways and the potential to use recycle produced water for other beneficial uses will sooner or later spark questions of ownership.

Dalton Kelley

Image: Photo of Ambassador Daniel Shapiro’s visit to the Hadera Desalination Plant in Israel. Flickr user U.S. Embassy Tel Aviv, Creative Commons.

Sources:

Bill Bailey et al., Water Control, Oilfield Rev. 30, (Spring 2000), available at https://www.slb.com/~/media/Files/resources/oilfield_review/ors00/spr00/p30_51.pdf.

Vance v. Wolfe, 205 P.3d 1165, 1173 (Colo. 2009).

Colo. Rev. Stat. Ann. § 37-90-137(7)(c) (West).

Colo. Rev. Stat. Ann. § 37-90-137(7)(a) (West).

CDR Associates Et Al., Produced Water Beneficial Use Dialogue: Opportunities and Challenges for Re-Use of Produced Water on Colorado’s Western Slope, https://www.colorado.gov/pacific/energyoffice/atom/14121 (last visited Jan. 5, 2017).

Denver Metro Chamber of Commerce, Energyhttp://www.denverchamber.org/policy_committees/energy.aspx (last visited Jan. 5, 2017).

Colorado Oil & Gas Association, Water Use Fast Factshttp://www.coga.org/wp-content/uploads/2015/09/15-Fact-Sheet_WaterUseFF.pdf (last visited Jan. 5, 2017).

Water Market Research LLC., Colorado’s South Platte Basin Water Rights Market, http://www.waterexchange.com/wp-content/uploads/2016/02/16-0217-Q1-2016-WWInsider-LO-singles.pdf (last visited Jan. 5, 2017).

Mose Buchele, Fracking Boom Spurs A Rush to Harness Brackish Water, State Impact (Mar. 28, 2013, 6:00 AM), https://stateimpact.npr.org/texas/2013/03/28/drilling-boom-spurs-a-rush-to-harness-brackish-water/.

Seth M. Siegel, Let there be Water 115, 119, 139, 225 (Thomas Dunne Books, 2015).

Water Quality Ass’n, Glossary of Salt Waterhttp://www.pacificro.com/watercla.htm (last visited Nov. 18, 2016).

Maxwell B. Kallenger, Who Owns All This Fracking Water?, La. L. Rev., (Oct. 29, 2015), available at https://lawreview.law.lsu.edu/2015/10/29/who-owns-all-this-fracking-water/.

Dalton Kelley, Environmental New Federalism and Fracking; Lessons from the Colorado Experience, California State University Bakersfield Walter Stiern Library (2014), available at http://www.csub.edu/library/thesis/kelley_d_pa_w14.pdf.

David B. Burnett, Potential for Beneficial Use of Oil and Gas Produced Water, Global Petroleum Institute (2004), available at http://www.circleofblue.org/wp-content/uploads/2010/09/beneficialuses-produced-water.pdf.

Climate at a Glance, NOAA, https://www.ncdc.noaa.gov/cag/time-series/us/5/0/pmdi/1/10/1895-2016?base_prd=true&firstbaseyear=1901&lastbaseyear=2000 (last visited Nov. 18, 2016).

Colo. Office of Econ. Dev. & Int’l Trade, Key Industry Food & Agriculturehttp://choosecolorado.com/wp-content/uploads/2016/06/CO-Food-and-Ag-Profile.pdf (last visited Nov. 18, 2016).

U.S. Energy Info. Admin., Rankings: Natural Gas Marketed Production, 2015https://www.eia.gov/STATE/rankings/#/series/47 (last visited Nov. 18, 2016).

U.S. Energy Info. Admin., Ranking: Crude Oil Production, August 2016https://www.eia.gov/STATE/rankings/#/series/46 (last visited Nov. 18, 2016).

Colo. Oil and Gas Ass’n, University of Colorado Economic Study Shows Oil and Gas Industry is Key to Colorado’s Economic Health and Stabilityhttp://www.coga.org/wp-content/uploads/2015/12/Press-Release-CU-Oil-and-Gas-Economic-Study-Key-Economic-Driver.pdf (last visited Feb. 10, 2017).

USDA, Data Products,http://data.ers.usda.gov/reports.aspx?ID=53580 (last visited Nov. 18, 2016).

State of Colo., Colorado Water Plan, 5-10 (2015), available at http://cwcbweblink.state.co.us/WebLink/ElectronicFile.aspx?docid=197270&searchid=d37a7960-b4ef-4ce5-9279-a1916ddc8f60&dbid=0.

Joe Murphy, Chart: Colorado is the Second-Fastest Growing State in the U.S., The Denver Post (July 7, 2016, 4:23 PM), http://www.denverpost.com/2016/07/07/colorado-second-population-growth-2015/.

Seth M. Siegel, Let there be Water 115, 119, 139, 225 (Thomas Dunne Books, 2015).

Bd. of Cty. Comm’rs of Cty. of Park v. Park Cty. Sportsmen’s Ranch, LLP, 45 P.3d 693, 701 (Colo. 2002).

 


County of Boulder v. Boulder & Weld Cnty. Ditch Co., 367 P.3d 1179 (Colo. 2016) (holding that the water court correctly denied the County of Boulder’s change of use application because it failed to meet its burden of proving an accurate historical consumptive use analysis).

Beginning in the early 1990s, the County of Boulder (the “County”) entered into a series of transactions to acquire the Bailey Farm, a 290–acre property historically used for irrigated agriculture and gravel mining.  The County aimed to develop the Bailey Farm into an open-space park featuring two ponds made from gravel pits filled with groundwater.  The ponds would expose groundwater and increase evaporation, requiring the County replace lost water through an augmentation plan under Colo. Rev. Stat. § 37-90-137.  To meet this requirement, the County filed an application in the District Court for Water Division No. 1 for underground water rights, approval of a plan for augmentation, a change of water rights, and an appropriative right of substitution and exchange.  Each component was interdependently linked.  The application hinged on approval of the change in water rights.  The County sought to change fifty inches of its Martha M. Matthews Ditch surface water right (“MM water right”), used historically to irrigate the Bailey Farm (the “Bailey Farm Inches”), into  an augmentation plan.  Boulder and Weld County Ditch Company (“BW Ditch”) opposed the County’s application, claiming injury from the proposed change.

At trial, the County submitted two historical consumptive use (“HCU”) analyses examining the Bailey Farm Inches to prove BW Ditch would not suffer injury.  Both analyses included a prorated estimate that assumed previous users delivered the Bailey Farm Inches entire to 101 acres of the Bailey Farm.  The County’s first analysis assumed full delivery of all fifty Bailey Farm Inches to Bailey Farm from 1950 to 2000; however, BW Ditch records later revealed the HCU analysis overestimated actual consumption by thirty-seven percent from 1973 to 2000.  As a result, the County supplemented the original HCU analysis with BW Ditch’s correct numbers from 1973 to 2000 and the same estimated numbers for 1950 to 1972.  The court cited three fatal deficiencies in the County’s HCU analysis.

First, the County inaccurately calculated actual use of the Bailey Farm Inches.  BW Ditch claimed the County overstated the number of acres the Bailey Farm Inches historically irrigated, which would unlawfully enlarge the Bailey Farm Inches water right and injure down-stream users.  Second, the County failed to prove the Bailey Farm Inches irrigated the seventy–acre parcel of land that the County purported.  Specifically, the County assumed without support that the Bailey Farm Inches irrigated the entire Bailey Farm and based the HCU analysis on these figures.  Finally, the County ignored the historical consumption of other water rights by conducting a parcel-specific analysis, rather than ditch-wide analysis.  The water court rejected the County’s findings as inaccurate and insufficient to meet the County’s burden of proving HCU, and consequently dismissed the entire application because the County could not demonstrate an absence of injury to others or that the proposed change in water rights would not fully compensate for the anticipated loss.  The County appealed the court’s determination.

On appeal, the Colorado Supreme Court affirmed the water court’s holding.  The Court divided its analysis into two stages.  First, the Court discussed applicable principles of Colorado water law.  Second, the Court discussed whether the County provided an accurate HCU analysis.

In its discussion of legal principles, the Court explained why an accurate HCU analysis is necessary for persons exposing groundwater through gravel pits.  It first explained the interaction between surface and ground water rights, and the Water Right Determination and Administration Act of 1969, which integrated the prior appropriation of surface with ground water while maximizing beneficial use of water.  Integrating surface rights with groundwater often requires augmentation plans.  Augmentation plans allow users out-of-priority groundwater diversions, so long as he or she adequately replenishes the diversion from existing water rights to protect senior water rights.  Water districts only approve augmentation plans that do not injure other users.  A careful accounting of actual water use may help demonstrate lack of injury and prevent the unlawful expansion of water rights.

Next, the Court examined long-established principles regarding changes of water rights and HCU analyses.  The Court noted that the amount of water changed must reflect the actual amount of water used and exist within the water’s contemplated use at the time of appropriation. This limitation comes from the principle that water rights derive from both appropriation and beneficial use.  Once diverted, the water’s beneficial use becomes the basis, measure, and limit of the water right. The Court also explained that modification of use itself cannot injure other water users.  Courts often intertwine these principles, as an expansion of a water right’s previous use often reduces the amount of water in return flow.  Thus, established principles allow water rights holders to change only as much water as they historically consumed in the manner contemplated by those rights.

The Court then analyzed whether the County upheld its burden in proving a reliable HCU.  The Court first found the County did not accurately report historical consumption of Bailey Farm Inches.  As the applicant, the County had to prove that previous users of the Bailey Farm Inches actually used the water as calculated in the HCU analysis. Despite this change, the Court found the inaccurate estimate cast serious doubt on the validity of the remaining figures and, thus, the entire report.  The County failed to provide a convincing explanation for their inaccurate HCU.  Thus, the Court affirmed the water court’s decision that the County failed to carry its burden of accurately quantifying the amount of Bailey Farm Inches actually used on the Bailey Farm.

The Court also held that County did not show the Bailey Farm Inches historically irrigated the entire Bailey Farm.  Covering a total of 101 acres, the Bailey Farm existed as two main parcels: a thirty-one-acre parcel and a seventy-acre parcel.  To carry its burden, the County had to prove that the 101 acres of the Bailey Farm claimed was within the lawful place of use and historically irrigated with Bailey Farm Inches.  The County failed to offer definitive proof that the larger portion of the Bailey Farm in fact received Bailey Farm Inches for irrigation.  Specifically, the Court pointed to the lack of evidence on the record demonstrating the seventy-acre parcel received any of the Bailey Farm Inches.  Without actual evidence showing past users irrigated the seventy-acre parcel with Bailey Farm Inches, the Court could not accept the analysis.  Moreover, the Court also explained that even if the seventy-acre parcel fell within the lawful place of use, the County would still have to prove that the MM water right was actually used on that land over time.  At first, different entities appropriated the Bailey Farm Inches to use in different properties.  Over time, the owners consolidated the properties. Because of the convoluted past, the water court required an accurate accounting of actual past use.  Absent actual proof of historical use, the water court declined to rely on the County’s HCU.  In committing these two errors, the County failed to prove the HCU and, thus, failed to prove a lack of injury to other water users.

The Court also rejected the County’s request for an appropriative right of substitution and exchange.  The Court found the County could not supplement its augmentation plan through a water lease with the City of Lafayette because the lease alone could not satisfy the County’s replacement obligations.

Accordingly, the Court affirmed the ruling of the water court and denied the County’s change of use application.

 Connor Pace

Image: A Western irrigation ditch. Flickr User Shaun Fischer, Creative Commons.


The effects of subdistrict requirements on agriculture in the San Luis Valley

For farmers, the future is never guaranteed. It’s filled with risk, uncertainty, and tough choices.  But for farmers in the San Luis Valley (“Valley”), that uncertainty is perhaps greater and the choices more difficult in the more than ten years since the Valley’s move towards groundwater subdistricting.

Following recent droughts and an increase pressure on local water supplies, Valley residents in 2005 faced an ultimatum to either develop a recharge plan for the area’s unique aquifer system or face government intervention in local water management. Choosing to avoid state involvement, the San Luis Valley, specifically the Rio Grande Water Conservation District paired with water users in the Valley, decided to move towards ground water management subdistricts to prevent depletion. But that move seems to have left many left local irrigators between an economic rock and a hard place, and it has created a situation where many are reevaluating the benefits of conservation easements.

While the long-term goal of ensuring the Valley’s sustainability by using the limited water resources wisely is one that is popular across the entire San Luis Valley, the change to subdistricts created a new set of challenges and economic consequences and changed the cost-benefit analysis for local land and water. These new market forces are forcing agriculturalists in the Valley to confront the purpose of why they are in the industry in new and more immediate ways. The choice essentially comes down either wanting to retain agricultural land as-is or wanting to increase one’s personal savings.

The San Luis Valley is a unique hydrogeological area located in south-central Colorado. At an elevation varying between 7500 and 8000 feet above sea level, the hydrogeology of the area creates both a confined and an unconfined aquifer system. The confined aquifer resides below the unconfined aquifer, and relatively impermeable beds of clay and basalt separate the two. This confining layer of clay and basalt does not exist on the perimeter of the Valley allowing surface water to recharge the confined aquifer and generate artesian pressure.

This artesian pressure arises from the increase in pressure generated from the recharge areas that have higher elevations than the Valley floor. This unique aquifer system helps counterbalance the short growing season and low average annual precipitation of around 7.5 inches a year, and it helps sustain a productive agricultural economy that is dependent on irrigation pumped out of the dual aquifers.

In response to a multiyear drought beginning in 2002 and the over-appropriation of the region’s limited water supplies, the Rio Grande Water Conservation District (“RGWCD”), in conjunction with the State Engineer, initiated groundwater management subdistricts in 2005 pursuant to Senate Bill 04-222 (now codified as C.R.S. § 37-92-501(4)). The RGWCD implemented subdistricts to ensure sustainability and to allow a water management plan that accounts for varying hydrological conditions across the Valley, specifically the hydrological connection between surface water and groundwater relating to the confined aquifer.

Groundwater subdistricts divide specific areas into hydrologically-like sections that allow for more efficient and effective conservation matters across an area. Subdistricts impose a collection of taxes that subdistrict authorities can use to purchase augmentation water and replenish aquifer systems. Agricultural water users in the area either have to join their respective subdistrict or, alternatively, develop their own augmentation plan. A subdistrict creates a five-year rolling plan on how to return water to the aquifer system.  These plans help busy farmers in the area, allowing them to save time and resources by not having to draft personal augmentation plans.

The subdistrict money collected is also used to pay farmers to fallow certain plots to conserve water.  This tax continues a stepwise process to pursue regulation of the confined and unconfined aquifers in order to maintain a sustainable water supply. However, users within the subdistricts can avoid this tax by trading surface water for groundwater. Farmers who substitute surface water will receive credit for the recharge of the groundwater they pumped and avoid paying the tax. This has turned out to be a popular option, which has created even more demand for an already over-appropriated basin. As a result, the ability to substitute water has created a hefty increase in the value of all surface water rights in the San Luis Valley, the larger economic effects of which are just now becoming apparent over a decade after RGWCD’s subdistricitng implementation.

In particular, and perhaps most surprising, the increase in surface water value derived from the subdistricting has had an effect on agricultural conservation easements in the Valley and their economic value. Agricultural easements aim to protect agricultural land and interests. A push for this type of easement arose out of a fear of further development of the area as well as a fear of losing water to opposing interests, such as an exportation of water to municipalities that culminated in the Colorado Supreme Court Decision American Water Development, Inc. v. City of Alamosa. Generally, conservation easements offer tax incentives for a legally binding agreement that permanently restricts the development and future uses of the subject property to protect certain conservation values. With an increasing demand (and short supply) of surface rights, those who have conservation easements on their land face the reality that the value of these easement no longer adequately reflects the increasing value of the associated water rights that would necessarily be tied up in the easement. If the market price for surface water rights outweighs the benefit of the easements, it could cause easement implementation in the Valley to slow substantially. This financial calculus is further complicated by the increased demand for water around the state. Even beyond the Valley, water is becoming a resource that is exponentially increasing in value in Colorado—partially due to recent droughts and a rapidly increasing population.

As a result, farmers and ranchers in the San Luis Valley are facing a new and unexpected cost-benefit dilemma. On one hand, the fear of losing an already limited resource to an opposing interest, such as transbasin diversion, creates a great incentive to enter into a conservation easement.  On the other hand, the potential increase in value of surface water in relation to the new subdristrict rules creates an incentive to steer clear of conservation easements in the hope of one day selling high-value water rights at a premium.

Essentially, the choice for a farmer of whether to have an easement comes down to the farmer’s reasons behind having that easement. If he or she wants to keep the land undeveloped well into the future, then an easement is likely the best option. If a farmer does choose a conservation easement, he or she will likely face the fact that they will suffer deadweight loss in the short run in exchange for the ability to preserve the land. However, if money is the priority, then keeping their water rights free of any conservation easement is likely a better choice. The changes resulting from the volatile water market emphasize the need for farmers and ranchers in the area to create strategic goals to combat and account for the variable change in the agriculture industry generated when new challenges like a move in the water market are presented to agriculturalists of the area.

While both subdistricts and easements are voluntary, the economic realities of the Valley are increasingly pushing San Luis Valley agriculturists to pick one or the other. And while the two options are technically not mutually exclusive, each does have a have large effect on the other, creating either a loss monetarily and in future options or in the ability to preserve the condition of one’s land for future use and enjoyment. And while there are easements available that would not encompass a water right, given their purpose in the San Luis Valley and the importance water plays in the traditional use of the land, such an easement would be hard to find.

Ultimately, the idea of subdistricting was inevitable, and the manner in which it came about in the San Luis Valley allowed input from local people.  The long-term goal of ensuring the Valley’s sustainability by using the limited water resources wisely is one that remains popular among agriculturalists. Nevertheless, the move has created a new set of challenges and economic consequences by increasing the value of surface rights in the Valley and changing the cost-benefit analysis for local land and water owners to enter into conservation easements. These new market forces are driving agriculturalists in the Valley to confront in new and more immediate ways the purpose of why they are in the industry. Those seeking the long-term satisfaction of retaining agricultural land for the purposes of agriculture will continue to find a higher value in conservation easements. But those seeking monetary gain and flexibility in the future will be drawn to avoiding any easements tying the water to the land.

While deciding between an easement and selling surface rights is a voluntary choice that one can make at his or her own leisure, economic conditions in Colorado are accelerating the need for a decision on the matter. Truly, Sun Luis Valley agriculturists need to develop strategic goals and determine the purpose of their operations.

            Kole Kelley

Image: A look at a fallow field in the San Luis Valley. Flickr user Ken Lund, Creative Commons.

References:

Findings of Fact, Conclusions of Law, Judgment and Decree, In re Rules Governing New Withdrawals of Ground Water in Water Division No. 3 Affecting the Rate or Direction of Movement of Water in the Confined Aquifer System (“Confined Aquifer New Use Rules for Division 3”), Case No. 04CW24, ¶ 523, ¶ 533 (Dist. Ct. Colo. Water Div. No. 3, Nov. 9, 2006), aff’d sub. nom. Simpson v. Cotton Creek Circles, L.L.C., 181 P.3d 252 (Colo. 2008).

Alamosa-La Jara Water Users Protect. Ass’n v. Gould, 674 P.2d 914, 918 (Colo. 1984).

American Water Development, Inc. v. City of Alamosa, 874 P.2d 352, 367 (Colo. 1994).

William A. Paddock, Groundwater Regulation in Water Division No. 3, A Work in Progress, prepared in conjunction with a presentation given for the Colorado Bar Association, Water Law Section (CLE), September 2010, page 7.

Simpson v. Cotton Creek Circles, L.L.C., 181 P.3d 252, 263 (Colo. 2008).

Colo. Rev. Stat.  § 37-92-501 (2016).

Martin Smith, Water Supply, Shortage, Human Impact & Public Health, http://panmore.com/water-supply-shortage-human-impact-public-health (last updated June 18, 2015).

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Curry v. Pondera Cty. Canal & Reservoir Co., 370 P.3d 440 (Mont. 2016) (holding that: (i) the Water Court did not err in concluding that the number of shares issued by water company determined the company’s rights; (ii) water supply company’s rights corresponded to size of service area as opposed to a historical place of use; and (iii) the Water Court erred in determining water supply company put storage rights to beneficial use prior to 1973).

The Curry Cattle Company (“Curry”) is a private landowner in Montana and owns shares to irrigation rights in the Birch Creek Flats (“Flats”). Curry obtained these rights in 1988, some of which are the oldest rights in the Marias River Basin. Pondera County Canal & Reservoir Co. (“Pondera”) provides land owners in Pondera County with water shares for beneficial use. Pondera possesses water rights to divert from Birch Creek, as well as a complete distribution system to serve the area.

This case originates from a dispute between the parties regarding waters in the Birch Creek. Pondera’s predecessors in interest secured some of the water rights in question through the Carey Land Act (“Act”), a federal law meant to encourage relocation the American West. In response, Montana set up the Montana Carey Land Board (“MCLB”), which sought to meet the requirements laid out in the Act. The Act functioned by setting up operating companies comprised of shareholders who had rights to water as determined by acres of land owned. Under the Act, the operating company maintains ownership of the water rights for a service area. In this case, the service area is accompanied by 72,000 water shares. Land owners in the service area may acquire these water shares. Pondera’s predecessors operated under the Act and began appropriating water for irrigation and sale in the late 1800s, eventually organizing as the Pondera Canal Company. The Company officially registered as an operating company under the requirements of the Carey Act in 1927. As currently aligned, individual stockholders own the Pondera Company, which distributes water as such on a per-share basis.

Disagreement over the priority of the Curry’s rights under this scheme existed for some time before this case. In 2004, Pondera communicated to Curry that its water share was less than previously believed. Curry rejected this assertion and continued to put more water to beneficial use than Pondera believed it was entitled. In 2005 Pondera locked Curry’s head gate, leading Curry to file a complaint alleging Pondera interfered with their water rights.

The Water Court initially ordered a preliminary injunction against Pondera to unlock the head gate. In 2008, the Water Court held an a six-day hearing to determine the correct quantity under the water right. The water master held in favor of Curry, finding the beneficial historic use of its water right established its water quantity. In 2014, the Water Court issued an order amending and partially adopting the master’s report. The Water Court determined that the rights in question instead correspond to the number of shares MCLB authorized for the project. Curry appealed this order to the Montana Supreme Court (“Court”).

The Court reviewed de novo five distinct issues resulting from the order of the Water Court. The Court also reviewed whether Water Court conducted its review of the master’s findings properly under a clear error standard.

The Court first reviewed the Water Court’s determination that a stockholder’s actual historic use limits the water rights of an entity organized under the Carey Land Act. Before the Court, Curry argued that beneficial use is the touchstone of water law in Montana, and therefore the Water Court improperly placed Pondera’s rights above all others by allowing it to retain ownership over water that was not put towards beneficial use. In opposition, Pondera argued that its beneficial use was not shown through actual irrigation, but by putting water into sale and service for shareholders. The Court reviewed the history of Montana water law and relied on a 1912 Montana Supreme Court case, Bailey v. Titinger, which held that either system capacity or company need would determine the extent of rights, to clarify the doctrine of beneficial use. The Court noted Montana public policy encourages public service corporations in the endeavor of irrigation. Therefore, the Court held that the Water Court did not err in determining that water rights paralleled the actual shares issued, and that sale of water unquestionably constituted a beneficial use.

The Court next confronted the issue of the Water Court’s grant of a service area to Pondera rather than a place of use based on historically irrigated land. Curry contended that the Water Court misinterpreted Bailey in entitling Pondera to a service area larger than the historical place of use. Pondera argued that the service area was the appropriate boundary for determining place of use. The Court began by discussing the concept of appurtenance of water to the land as a general rule in Montana law. The Court then explained that due to the movement of water inherent in the scheme of the Carey Act, a strict requirement of appurtenance was not applicable in this case. The Court noted that under the Act, the individual stock certificate’s appurtenant land did not define the overall place of use. Relying on Bailey, the Court affirmed the Water Court by holding that the idea of a service area is the proper method of satisfying the Carey Act’s place of use requirement. The Court declined to determine the exact size of the service area at this stage of litigation.

The Court also considered whether there was any evidence of water use by irrigators on the Birch Creek Flats prior to 1973. The water master found some evidence of historic use on the Flats, including some releases from storage facilities that eventually flowed into canals utilized by non-Pondera water users, but determined that these releases did not amount to Pondera use warranting inclusion of the Flats within the service area boundary. However, the Water Court found that there was evidence of Pondera water being used on the Flats prior to 1973, and concluded that the Flats should be considered as falling within the boundaries of the Pondera service area. The Court evaluated the use of water in the Flats based on Pondera’s actions, and disagreed with the Water Court’s conclusion that Pondera put the water to beneficial use on the Flats prior to 1973. The Court reversed this portion of the decision and remanded for further consideration.

The Court next examined whether the Water Court erred by substituting its judgment for that of the master regarding the “Gray Right.” Curry argued that the judgment of the Water Court was erroneous regarding the flow rate of the Gray Right. Pondera in turn argued that the Master’s report contained contradictory findings and therefore the Water Court’s judgment was not erroneous. The Court held that the Water Court applied the appropriate standard of review to the Master’s findings, and the Water Court’s determination of the flow rate for the Gray Right was not clearly erroneous.

Finally, the Court considered whether the Water Court’s tabulation of the parties’ respective claims to water rights should have included volume measurements when it did not. Pondera contended that the tabulations should have included volume. The Court held that while such measurements would undoubtedly be helpful, this was a matter of discretion for the Water Court.

Accordingly, the Court partially affirmed the Water Court by finding Pondera’s water rights corresponded to actual shares allotted under the Carey Act and extended to its entire service area, and reversed and remanded the determination with respect to the acreage determination.

Brian Hinkle

Image: Swift Dam on Birch Creek in Pondera County, Montana. Flickr User Sam Beebe, Creative Commons.