The Colorado Water Plan, released in 2015, called for the use of alternative transfer methods (“ATMs”) to help meet growing municipal water needs while preserving agricultural communities. However, very few of these projects have been established—due in part to cities’ reluctance toward temporary water supplies. But a new type of perpetual ATM may bring the assurances cities require and help make ATMs a viable alternative to the permanent sale of agricultural water rights and the negative outcomes of such buy-and-dry transfers.

ATMs have successfully moved water from agricultural irrigation to a variety of uses, including municipal, industrial, and environmental. Despite these victories, ATMs have been slow to catch on—particularly in Colorado, where ATMs are relatively new—due to uncertainty of how these deals will play out in the long term. ATMs are traditionally temporary leases of water from agricultural irrigators to municipalities, and the brief duration of these water rights has made cities reluctant to become involved in the process. However, a new kind of ATM that leases water in perpetuity may be the answer to questions of reliability and encourage new ATM projects in the future.

It is no secret that the arid western United States is running low on water, and drier, warmer weather could be the new normal in Colorado and the West. A recent study, commissioned by the Colorado Water Conservation Board (“CWCB”), found that Colorado’s average temperature has risen by about 2 degrees Fahrenheit over the last thirty years. But that has not stopped rapid population growth in urban and suburban centers, and warmer temperatures will challenge states’ ability to provide a reliable water supply to meet the competing water demands of rapidly growing cities, farms, and ecosystems. As more people move west, cities will have to find new, creative ways to provide sufficient water.

To meet municipal water demands, cities have increasingly purchased senior agricultural water rights, and permanently removed that water from the farms—a process known as “buy-and-dry.” While such transactions can be profitable for individual farmers, they threaten to undermine rural communities as the farmers and supporting businesses move out of the area, resulting the economic collapse of agricultural communities and environmental degradation. To combat the negative consequences of buy-and-dry, water users, researchers, and policy makers are developing innovative strategies and policies to improve the flexibility of western water law. Many states have adopted new policies that allow for water to be leased, rather than bought outright.

These alternative transfer methods have been used in other western states for decades, and Colorado is finally catching up, passing legislation that allows for a more streamlined, and less costly, process for implementing water transfers than traditional pathways through the water court system. The Colorado legislature has passed several bills in past ten yearsthat create pilot programs to test the legal and functional validity of ATMs and make ATMs easier to administer.

However, even though pilot programs such as the Catlin Canal Pilot Leasing-Fallowing project have been successful, the water world moves slowly. ATMs have been met with considerable skepticism from agricultural water rights holders and cities alike. Some farmers are concerned that ATMs will lead to their water rights being taken, and cities have concerns over the certainty and reliability of leased—rather than purchased—water. But a first-of-its-kind ATM developed between Larimer County and the City of Broomfield has provided an answer to the lack-of-certainty argument by establishing a lease that is operational in perpetuity.

CALIFORNIA AND ARIZONA

Several western states have long histories with ATMs. For example, California and Arizona have established various forms of rotational lease-fallowing agreements—wherein farmers forgo irrigating a portion of their land for a growing season and lease the saved water. In 2013, the Yuma Mesa Irrigation and Drainage District and the Central Arizona Groundwater Replenishment District entered into a pilot short-term fallowing program to help keep water in the Colorado River. In northern California, several water districts in Sacramento River Valley entered into one-year leases to provide water to a group of water districts, called the Westside Districts, to supplement their water needs during a drought, by fallowing parts of land historically used for rice farming. The southern California cities of San Diego and Los Angeles have temporary leased water from farmers in the Palo Verde and Imperial valleys for years, and these programs have helped meet municipal needs while keeping agricultural lands in production. Colorado legislators, looking to these and other examples, decided that if ATMs could work in those water-short states, they might work for Colorado, too.

COLORADO

Like other Western states, Colorado water law is rooted in the principles of prior appropriation. Under this doctrine, a water right is merely a usufructuary right, meaning that the water right holder has permission to use a state’s public water resources in a specific way defined by the type water right granted. However, that is not to say that there is no inherent property interest in a water right. Water rights can be sold, leased, conveyed, or donated, in whole or in part. Water rights include the right to change the type and place of use, as well as the point of diversion, so long as other water rights holders are not injuriously affected. To ensure no injury occurs when one water right holder wants to change the use or location of the right, applicants generally must go through a formal judicial process in Colorado’s water court system.

Unlike other Western states, Colorado has a dedicated court system for the establishment and transfer of water rights. While the Colorado water court system has received praise for its due process, fairness of outcomes, and expertise of water judges and referees, it can also be a time-consuming and expensive process. Despite recent efforts to improve efficiency, the water court process remains a difficult undertaking. Because of the time and money required to change a water right, temporary transfers of water are generally not seen as worth the effort. So permanent sale of agricultural water rights and the negative impacts of buy-and-dry continue. In order to protect agricultural communities and still provide water for growing cities, the Colorado Water Plan promotes the use of ATMs.

ATMs help prevent the negative consequences of buy-and-dry by allowing farmers to maintain legal ownership of their water rights, while temporarily transferring that water for municipal or industrial uses. Alternative transfer methods come in many different models, including rotational fallowing agreements, deficit irrigation, interruptible water supply agreements, payments for conservation, water banks, and crop switching. ATMs provide a streamlined permitting process that keeps water transfer cases out of the expensive and time-consuming water court. For example, an interruptible water supply agreement (“IWSA”), which allows water right holders to temporarily transfer their historical consumptive use to another water user without permanently changing the water right, can be approved by the state engineer (outside of water court) as an option agreement which can be exercised for up to three out of ten years and can be renewed by the state engineer for as many as three ten-year periods total (or, thirty years). Notification requirements for IWSA applicants ensure that potentially affected water users can object to the IWSA if they think their water rights may be injured. However, since ATMs are a relative newcomer to water management, establishing an ATM presents potential legal, financial, and structural challenges—problems that legislators in Colorado have been trying resolve.

The Colorado General Assembly has passed various bills designed to make water law more responsive to the challenges of today’s changing water allocation needs. In 2003, legislators passed a law that enables the use of IWSAs. Another bill, passed in 2013, clarified the rules for long-term water leases, helping keep these temporary change cases out of water court, saving applicants time and money. An additional piece of legislation, House Bill 13-1248 (codified at C.R.S. § 37-60- 115(8)), which was also passed in 2013 and extended in 2017, allows the Colorado Water Conservation Board to authorize up to fifteen rotational lease-fallowing pilot projects. While this bill has currently only produced a single project—the Catlin Pilot Project—that project has been successfully delivering benefits to participating farmers and municipalities alike for the past three years.

CATLIN PILOT PROJECT 

Approved in 2015, the Catlin Pilot Project is a ten-year ATM that makes senior water rights available for municipal use by rotationally fallowing a portion of irrigated land in the Lower Arkansas River Basin. Six farms signed on to the pilot project to provide water to the towns of Fountain, Security, and Fowler. The project, now three years in, has consistently provided great benefit to the farmers and the municipalities. In 2016 alone, the Catlin Pilot Project delivered more than 400 acre-feet of water to the municipal participants, and farmers received an average of $1004 per acre for each of the 237.9 acres fallowed.

However, since this was the first pilot project undertaken, reaching an agreement between the parties—and soothing the fears of other water rights holders in the Catlin area—took a great deal of work. The CWCB also had a number of terms and conditions about how to go about drying-up the land. For example, farmers are contractually obligated to prevent the spread of noxious weeds, blowing soils, and erosion—all of which are typical outcomes and concerns regarding fallowed land.

By all accounts, the Catlin Pilot Project has been a rousing success story for ATM use in Colorado. In all three years of operation, the participating farmers achieved temporary dry-up while controlling noxious weeds and preventing blowing soils and erosion. The revenue produced by leasing a portion of their water allowed farmers to make significant upgrades to their farms, such as laser leveling their fields, installing drip systems, and improving the soil quality on the fallowed lands. The municipalities have consistently received nearly their entire portion of consumptive use water from the pilot project.

The accomplishments of the Catlin Pilot Project generally demonstrate that rotational lease fallowing is a viable means for farmers to temporarily provide water to municipalities while keeping agricultural communities going. And the continued experience gained during the Catlin Pilot Project will help identify ways to streamline operations and administration for future rotational fallowing-leasing projects. For example, the lease-fallowing tool developed for the Catlin Pilot Project could be adapted for other leases throughout Colorado.

So why is there only one of these pilot projects? It’s not for a lack of interest of the farmers—the Lower Arkansas Valley Water Conservancy District’s executive director Jay Winner said he has 5000 leases for water available from farmers who want to temporarily lease their water rights to cities. But almost no cities have expressed interest in entering into such an agreement. One reason for this lack of interest could be due to the fact that for the first time since 2012, Colorado is not facing drought conditions. Another likely answer is that municipalities simply do not want temporary water supplies. Cities need to be certain that they have enough control over the water to ensure long-term reliability in supply.

HOLD-UPS

The water community tends to be cautious about innovations in water law, and ATMs are relative newcomers to Colorado water policy. Agricultural water rights holders harbor fears of ATMs reducing the amount of water they are entitled to, despite provisions in the statutes that specifically protect against such an occurrence. There are also concerns that ATMs may be attracting investment firms to purchase agricultural water rights as speculative investments and make a profit by leasing the water, which could lead to some agricultural land no longer being irrigated. For example, Boulder-based real estate investment and management company Conscience Bay has purchased several ranches in Colorado, and the company’s president has expressed interest in exploring ATMs to provide water for municipal, fishery, environmental or other uses. While traders have bought and sold water rights for decades, the practice has increased in recent years, due in part to investors seeing Western water shortages as a change to make a substantial profit.

An additional issue concerning ATMs is the fact that these projects require complex agreements that need a great deal of time and money to achieve, which can make cities hesitant to pursue them for a temporary water right. Given the fact that it can take years to solidify these agreements, a ten-year lease may be considered too costly when cities could easily purchase agricultural water rights instead. And while pilot projects like the Catlin Pilot Project may be useful to illuminate how an ATM could be implemented, the variances in hydrology across the state and the specific needs of any given municipality means that such projects cannot be thought of as a one-size-fits-all solution to be replicated in all areas.

Municipal water utilities prefer permanent water supplies over the temporary water provided by an ATM. Planning and development of new communities takes a great deal of time, effort, and money, and cities need to be sure that the water they procure for these future residents will be available when needed. It is easier and cheaper for cities to buy farmers’ water rights outright than invest in water that may not be available at the end of the lease period, especially if the farmer’s needs change and he or she decides not to renew the lease. Even a thirty-year lease for water may be too tenuous to build a reliable water supply for planning and building a community of full-time residents. If a city expands by building a new community, it needs to be certain that water will be available at all times—forever—not just for the next thirty years. This uncertainty has deterred cities from participating in ATMs and has furthered the practice of buy-and-dry in Colorado. However, in August 2016, a first of its kind perpetual ATM was finalized between Larimer County and the City of Broomfield—and it may be the answer to quelling concerns about long-term municipal water supply reliability.

MALCHOW FARM

It all started when the Malchow Farm outside of Berthoud, Colorado went into foreclosure. The farmer, who had leased the land for thirty years, could not afford the $8.4 million price tag, $6.5 million of which was made up of the 240 units of Colorado-Big Thompson Project water. Neither could Larimer County, who wanted to keep the farm in production. So, in 2016, Larimer County sought and found a partner to help shoulder some of the costs.

Working through the Larimer County Open Lands Program (“LCOLP”), Larimer County set out to prove that implementing a perpetual ATM water supply for a municipality was a workable solution to permanently drying-up the farm. Since LCOLP primarily deals in conservation, they were comfortable with the idea of a perpetual arrangement. After meeting with several municipal providers, the County and City of Broomfield agreed to enter into an InterGovernmental Agreement that included an innovative permanent water leasing agreement which keeps water on the farm while helping fill municipal water needs.

In the deal, Broomfield paid $3.77 million for: (a) an interruptible water supply agreement on 80 units of Colorado-Big Thompson (“C-BT”) water; and (b) full ownership of 115 units of Colorado-Big Thompson water with the ability for Larimer County to lease-back. The deal offset nearly half the purchase price for Larimer County, and saved Broomfield money by leasing the water, which was less expensive than purchasing it. This agreement allowed Larimer County to buy the Malchow Farm, conserve 211 acres of farmland along with its value as a community buffer and educational tool, and keep 125 units of C-BT water on the farm. And because the ATM uses C-BT water, which is administered by Northern Water Conservancy District (“Northern”) and its users follow Northern’s rules, the water transfer is not required to be adjudicated in water court.

Finalized in August 2016, Northern’s set of rules around sharing beneficial uses of C-BT water serves to minimizes potential injury to other users and reduces the cost of establishing water sharing agreements. Under the interruptible water supply agreement, Broomfield can get water from the Malchow farm three out of ten years and must pay $18,000 those years. While on the surface, this may look like a typical IWSA, this one is special because rather than only being allowed for a total of three ten-year periods, this IWSA has no such limit. Broomfield is assured that they will have the right to call for water in three out of ten years, forever.

The fact that this ATM is operational perpetually is what makes it so unique. While Broomfield does not own the water rights, they will always be able to call on them, which provides the necessary certainty missing in other types of ATMs. This ATM adds eighty acre-feet of ATM water toward the 2015 Colorado Water Plan’s goal of 50,000 acre-feet by 2050. The hope is that this groundbreaking perpetual ATM will provide landowners, conservation entities, municipalities, and water districts in Colorado with an additional tool to help negotiate future water sharing agreements as an alternative to buy-and-dry.

CONCLUSION

The wary water community in Colorado has been slow to embrace ATMs as tools to achieve a hydrological balance that allows cities and farms grow side by side by sharing water. The result has been a proliferation of buy-and-dry deals that leave agricultural communities in ruins. Given the choice, most agricultural water rights holders would prefer to lease their water over selling it outright. But ATMs will never prevail over buy and dry until they can provide easy (and reliable) access to water supplies for municipalities. Hopefully, the new permanent model of ATM developed by Larimer County and Broomfield can serve as a template that other communities can implement to provide municipal users with the certainty they require while maintaining agricultural lands.

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