A Tough Economic Choice for Water Rights Holders in the San Luis Valley

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).

San Antonio, Los Pinos & Conejos River Acequia Pres. Ass’n v. Special Improvement Dist. No. 1 of Rio Grande Water Conservation Dist., 270 P.3d 927, 948 (Colo. 2011).

Lora Abcarian, Subdistrict begins implementation of groundwater management plan, THE PRODUCE NEWS (Sept. 10, 2012), http://theproducenews.com/news-dep-menu/test-featured/8762-subdistrict-begins-implementation-of-groundwater-management-plan.

Matt Hildner, Groundwater sundistrict plan advances in valley, PUEBLO CHIEFTAIN (Mar. 5, 2016), http://www.chieftain.com/special/water/4514689-120/subdistrict-groundwater-valley-management.

American Water Development, Inc. v. City of Alamosa, 874 P.2d 352,3 58 (Colo. 1994).

Paige Blanfenbuehler, After years of drought and overuse, the San Luis Valley aquifer refills, HIGH COUNTRY NEWS (May 26, 2016), http://www.hcn.org/articles/after-years-of-drought-and-overuse-a-water-basin-refills-in-the-san-luis-valley.

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