3

The Role of Law in the Transfer Process

What I witnessed for a few hours was the operation of that legal mechanism by which water is prepared for its eventual pumping toward money. It has to be adjudicated, it has to have its claims of ownership documented, it has to have its title quieted, it has to be made merchantable, saleable, which is what enables it to be freed up from land, acequia, community and tradition.

Stanley Crawford, 1990

In the western United States, as in virtually all societies of the world, water is a public resource that is used under rules designed to achieve broad public benefits. Beyond the most basic human needs, it was important in the midnineteenth century to encourage productive use of water in the West, where its availability is seasonally and geographically limited. This was achieved by allowing citizens to use water for private gain and by providing legal protection for those uses. Like a subsidy, the award of water rights to private parties created incentives to encourage the investment and economic activity necessary to meet both regional and national development goals.

Investments in natural resource development sparked both economic activity and settlement in the early West. The land was almost all federally owned, so a system of according legally secure water rights to the first user encouraged investments in irrigation systems to serve homesteads carved out of the public domain and mines on public land. Although the land was federally owned, the government did not dictate how rights to water would be allocated. Instead, it left the settlers to their own devices, and they created a system of appropriative rights to use the water found on the government's land. The earliest user to take water out of the stream and put it to a “beneficial use” acquired the right to continue using it and could prevent others from interfering with the use. This approach was consistent with the government's desire to promote western expansion as well as local desires for economic development. Thus the



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Water Transfers in the West: Efficiency, Equity, and the Environment 3 The Role of Law in the Transfer Process What I witnessed for a few hours was the operation of that legal mechanism by which water is prepared for its eventual pumping toward money. It has to be adjudicated, it has to have its claims of ownership documented, it has to have its title quieted, it has to be made merchantable, saleable, which is what enables it to be freed up from land, acequia, community and tradition. Stanley Crawford, 1990 In the western United States, as in virtually all societies of the world, water is a public resource that is used under rules designed to achieve broad public benefits. Beyond the most basic human needs, it was important in the midnineteenth century to encourage productive use of water in the West, where its availability is seasonally and geographically limited. This was achieved by allowing citizens to use water for private gain and by providing legal protection for those uses. Like a subsidy, the award of water rights to private parties created incentives to encourage the investment and economic activity necessary to meet both regional and national development goals. Investments in natural resource development sparked both economic activity and settlement in the early West. The land was almost all federally owned, so a system of according legally secure water rights to the first user encouraged investments in irrigation systems to serve homesteads carved out of the public domain and mines on public land. Although the land was federally owned, the government did not dictate how rights to water would be allocated. Instead, it left the settlers to their own devices, and they created a system of appropriative rights to use the water found on the government's land. The earliest user to take water out of the stream and put it to a “beneficial use” acquired the right to continue using it and could prevent others from interfering with the use. This approach was consistent with the government's desire to promote western expansion as well as local desires for economic development. Thus the

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Water Transfers in the West: Efficiency, Equity, and the Environment prior appropriation doctrine was adopted throughout the American West. As western economies matured, the water rights system proved adaptable to increasing and competing demands. The key to adaptability was that water rights were not restricted to use on a particular parcel of land or a specific type of use. In principle, rights could be transferred from one user to another, and water could be delivered as far as technology and economics could move it. The ability of an appropriator to transfer a water right—that is, to convey the legal priority to use a quantity of water for a beneficial purpose—is the valuable “property” that the law recognizes in water. A transfer is subject to the condition that a change in use must not injure any other water rights holder. This “no injury” rule is the only universal restriction on water transfers. Some states, however, began to freight the privately held right with other restrictions. During the early part of the twentieth century, states enacted laws that sometimes frustrated the transferability of water rights. The laws were responses to sentiment that sought to stabilize agriculture and prevent speculation. Some states ruled that water rights were attached to a particular parcel and could not be transferred away from it. Others restricted transfers out of agricultural uses. Together with application of the no injury rule, these restrictions made the transfer process more cumbersome but still worth the effort when the profits from selling were great enough. A far more serious problem with the transfer process, however, is that several interests historically have been left out of the decisionmaking processes used to allocate and reallocate water. As discussed in Chapter 2, these include but are not limited to rural communities, ethnic minorities, fish and wildlife and their habitats, and the public. It is now clear that changes in water law and institutions are needed to ensure that all the significantly affected interests, or third parties, are represented in water transfer negotiations. Indeed, consideration of the interests of parties not directly involved in buying or selling a water right is becoming part of the water transfer process. States are changing their laws in a variety of ways to respond to demands for broader public representation in water transfers. Several federal laws and programs are beginning to address transfer-related problems. The patchwork of state and federal laws acts as a bandage—covering specific issues such as endangered species, water quality, and wetland protection—but fails to provide a comprehensive allocation vision. In addition, some interests have inveigled public agencies or parties directly involved in transfers (sometimes cities or other public entities) to give them a

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Water Transfers in the West: Efficiency, Equity, and the Environment voice in the decisionmaking process and compensation for values lost. Although the evaluation of third parties in water transfer activities in the West remains incomplete, methods for including them in the process can be gleaned from the experiences in several states. Based on research and the case studies reflected in Chapter 5, Chapter 6, Chapter 7, Chapter 8, Chapter 9, Chapter 10 through Chapter 11 of this report, the committee has identified the following institutional measures and legal authorities for integrating multiple public values and protecting affected interests in the water transfer process: public interest review processes; impact assessment; comprehensive planning; judicial public trust doctrine; Clean Water Act, Section 404; ad hoc negotiation among affected parties; and other legislation (including, but not limited to, instream flow laws, area-of-origin protection, water quality laws, conservation programs, endangered species protection, and land use controls). It seems inevitable that one price of improving water laws will be greater complexity. Yet the need to consider interests important to broad segments of society is so fundamental as to justify some complication of the transfer process. The committee believes that rigorous consideration of public values is necessary and that it is possible without creating major obstructions to desirable transfers. A goal of modern western water policy, then, is to streamline the systems that impose superfluous restrictions, costs, and delays on the transfer process and, at the same time, to devise new ways to account for important interests that are now left out. These actions may result in a net increase in the transaction costs of transfers, but these costs are justified by the greater public satisfaction and broader public benefits they will ultimately bring. Moreover, a system that accounts for all significant costs will in the end produce a fair and efficient allocation of water. It should encourage transfers with high net gains and discourage those with high third party costs. As mentioned above, there is no coherent body of law governing how and under what conditions water is transferred. A single transfer can involve several state and federal laws. A transfer in one state can take several years and cost thousands of dollars, whereas an apparently similar transfer in another state can be accomplished quickly and cheaply (MacDonnell, 1990). The various elements of the law of water transfers as it exists now are described below, followed by a discussion of options for improving water law and policy.

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Water Transfers in the West: Efficiency, Equity, and the Environment STATE WATER ALLOCATION LAWS Once water is appropriated and a right established, that right generally may be used in other places, it may be used for other than its original purpose, and it may be conveyed to others. Water rights are property rights and they include the right to make changes. As with other property rights, water rights are always subject to redefinition and regulation by state law. From the earliest prior appropriation cases, water rights could be changed only to the extent that no other water rights were affected adversely. Other conditions have been added by some states to achieve other social goals. There is a general trend in the West of encouraging transferability of water rights to achieve greater efficiency of water use. This trend is visible in the removal of some formal barriers to transfers, implementation of existing laws in ways more conducive to transfers, and, in a few cases, the enactment of legislation to encourage transfers. Legislation that directly involves states in facilitating transfers is rare; California law, however, directs state officials to play an active role in facilitating transfers, and, as noted in Chapter 2, both California and Idaho operate water banks. Although many states apparently perceive the benefits of water transfers, few have fully considered how best to deal with the negative effects on third parties. Although the issue is not treated with a coordinated approach, several state laws and programs address some of the impacts on affected parties or establish processes to help assess, avoid, or mitigate the effects of transfers. But the overriding legal concern at the state level has been to protect other water rights holders —not third parties—from transfer impacts. The No Injury Rule All third party protection schemes build on one fundamental principle, the no injury rule. In the western states, a person seeking to change the use of a water right must request permission from an administrative board, state engineer, or official (or, in Colorado, from a court). The request may come from either the buyer or the seller; sometimes contracts for water transfers are made contingent on getting this approval. Changes in the way water is used, place of use, point of diversion, purpose, or time of use are permitted subject to the condition that the change must not impair uses by other water rights holders. This means that a change in use must not alter the stream conditions that existed when others made their appropriations if it would interfere with others' ability to continue their rea-

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Water Transfers in the West: Efficiency, Equity, and the Environment The Role of the State Engineer in Water Transfers In every western state, some public official or entity is responsible for administering the state's programs of allocation of use of water resources. In the early days of settlement, water rights were initiated by diversion and use and by the posting and recording of notices of intent to use water from a stream much in the manner of a mining claim. By the beginning of the twentieth century, this system began to give way to an application and permit system administered by a state official (the “Wyoming Plan”). In many states this person was referred to as the state engineer, although sometimes the official has been designated state water commissioner, state reclamation engineer, chief engineer, or state hydraulic engineer. Today, although the title of state engineer continues to exist only in Colorado, Utah, Wyoming, New Mexico, Nevada, and North Dakota, that office or its equivalent in other states has responsibility for most state water development and use programs. In general, water rights are property rights and may be transferred as part of the sale of land on which they are used or apart from the land. Typically, applications to obtain approval of a change in point of diversion or place, period, or nature of use of a water right in a western state are filed with the state engineer. Although the procedures may differ from state to state, the purposes are similar. The state engineer examines proposed transfers both to protect existing uses of water from the effects of third party water rights transfers and to protect the public interest. The state engineer must also ascertain the amount of water that can be transferred, which is generally only the quantity that has been consumed by the prior use. Amounts diverted but not consumed must be left in the stream to protect other users. In making this determination, the state engineer must also consider the impacts of a proposed change on the timing of withdrawal and return of the unconsumed part of the water diverted to a source. Such a change could occur where a right is proposed to be converted from agricultural use to municipal or industrial use. For example, most agricultural water demand is seasonal, whereas municipal and industrial use can be either continuous or seasonal, as is the case with golf courses and other landscape irrigation. Conversion of use without limitations and conditions could result in injury to other users of the resource. State engineers are quasi-judicial officers with responsibilities to make initial decisions concerning water rights matters. Their actions are governed by state statutes and prior court decisions

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Water Transfers in the West: Efficiency, Equity, and the Environment that have interpreted the law. Statutes are designed to provide an orderly process and to give some measure of security and certainty to established uses of water, thereby protecting the economy of an area. If holders of water rights could transfer the point of diversion or place, period, or nature of use of a right without regard for the effects such a transfer would have on other users, the entire water system of the West would be in jeopardy. To prevent such adverse impacts, the state engineer may impose conditions in transfer applications. These may include, for example, limitations on the duration of pumping, restrictions as to the depth or perforation interval of a well, and limitations as to the time of year in which water may be diverted. Even in the absence of any injury to other water rights holders, the state engineer in most states has the discretion to deny a transfer application on the basis that to grant it would be inimical to the public welfare of the state or would be contrary to the “public interest. ” Until recently, public interest review was occasionally used to deny appropriations for inefficient projects or to subordinate a prior right to a larger public project. State engineers are now being asked to use the principle to accommodate the full range of contemporary water uses from irrigation and hydropower to the protection of ecosystems. There are few precedents to guide the state engineer's discretion, and the problem is compounded by the argument that the judicial public trust doctrine requires that the balance be weighted in favor of environmental values. sonable uses. The no injury rule extends to all appropriators, junior as well as senior, and can be extended to other water use claimants. Strong as the no injury rule is, objecting third parties are not always fully protected. A change may be allowed if there will be enough water for the objecting water rights holder to enjoy the right. But the rights holder remains vulnerable to call by a more senior rights holder. Before the change, there might have been enough water in the stream to satisfy all rights holders, but now the original objector will have to cease taking water to satisfy the more senior right. This can happen when the change is entirely downstream of the objector if it results in there being less water for a downstream senior rights holder. The senior rights holder need not actually object to the change, because the principle of seniority ensures that

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Water Transfers in the West: Efficiency, Equity, and the Environment junior appropriators are responsible for guaranteeing that senior rights are satisfied. For this reason the objector can assert the increased vulnerability to a call as an “injury” and object to the change under the no injury rule. Permit proceedings for a change of use provide an opportunity for others to object. Permission may be granted even where injury is incurred, but conditions may be attached to protect other users— such as restricting the amount diverted, replacing water in the stream from other sources, or supplying supplemental water to objecting parties. Sometimes objectors accept cash or other concessions (e.g., headgates, sprinkler or drip irrigation systems, or reservoirs). Appropriators often complain of injury when a proposed change will deprive them of return flows they could use. (Irrigators typically return a large part of the water used for irrigation to the stream via drainage ditches, seepage, and surface runoff, and this water is used by other appropriators downstream.) If a farmer wants to irrigate previously unirrigated lands but not increase the area irrigated, the place of return flows may change. The return flows will no longer be available to another water rights holder who benefited from the return flows at the old location. Thus the change in place of use will not be allowed. One way to limit this type of transfer-related injury is to limit the transferable amount to the past consumptive use only. Historical Use Limitation Courts have added a gloss on the no injury rule to take account of the fact that water rights often exist on paper that do not reflect how water actually has been used. Typically in the West, the quantity of water represented by old rights is greatly overstated. Furthermore, rights often are stated in terms of the amount one may divert, even though much of the amount diverted actually has been returned to the stream. Courts and administrative agencies cannot rely on old court decrees for guidance because these are notoriously inaccurate indicators of the amounts of water actually put to beneficial use. Before there were state water agencies staffed with professional engineers to oversee the appropriation process, the quantities appropriated often were based on the “best guess” of the appropriator (which was typically high). Thus in many western states when an appropriator seeks to change the use of a water right, which is necessary to transfer the right away from the original land or to a new use, the amount of historical consumptive use must be determined. The quantity of water that may be transferred to a new use will be limited to the amount of water reasonably consumed. This calcu-

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Water Transfers in the West: Efficiency, Equity, and the Environment lation is based on historical evidence. Because accurate records of the amounts consumed are rare, the state engineer or water agency may consider the type of crops cultivated, soil type, climate, and other factors that indicate water consumption. In some cases, experts are hired; most agencies, however, rely on calibrated equations and climatic data to estimate use for particular locales and particular crops. The purpose of the historical use limitation on transfers and changes of use is to maintain the conditions that were present when all existing appropriators began their uses. It ensures that they will not be disrupted or harmed by changes. A common problem with transfers from agricultural to municipal use is that irrigation is usually seasonal and municipal demand is relatively constant all year. If a city buys a farmer's water right, the city may be able to take water out of the stream only at the time the farmer historically diverted it. The city may solve the problem by building a reservoir to store water during the irrigation season to be used later. Appurtenancy Restrictions Prior appropriation does not require that water rights be appurtenant (legally tied) to the land on which they originally were applied. Several states adopted appurtenancy rules during the reclamation era to promote a stable agricultural society. Under these rules, water rights can be transferred along with the land but not apart from it. There were several motives for states to adopt appurtenancy rules, which effectively negate the right to transfer or change the use of water rights. It was one way of containing the problem of overstated water rights: the restriction made it unnecessary to deal with the disruption of stream conditions that might result if an artificially large right could be transferred and actually used. This problem is now addressed by the historical use rule, a solution that requires engineering expertise and administrative personnel that were lacking in an earlier era when it was easier simply to prohibit transfers. Another motive for appurtenancy rules was to protect agriculture. Indeed, most laws restricting transfers or changes in use away from the land relate specifically to irrigation water rights. The laws were an attempt to keep good senior rights in agricultural uses. The rationale was that the rights would be “lost” to farmers if they could be moved to industry. Because agricultural rights were usually so overstated in amount, they were attractive to speculators. Prohibition on transfers away from the land limited the value of the farmer' s water right to its utility on the particular piece of land, a substantial modification of the farmer's property right in the water.

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Water Transfers in the West: Efficiency, Equity, and the Environment Most appurtenancy restrictions have been removed or diluted as the result of economic and social pressures. Most states allow severance from the original land if continued use there becomes economically infeasible. Still, at least five states retain some legal restrictions on transfers away from originally benefited land, although the precise effect of these restrictions is difficult to determine. They are likely only to chill certain potential transfers rather than actually prohibit ones that parties are determined to carry out. These restrictions may have some indirect benefits to rural communities and basins of origin by cutting down the number or kind of transfers, but they do not directly address the third party effects of transfers. Basin-of-Origin Protection Moving water out of a region can have obvious effects. The economy, ecology, water quality, lifestyle, and potential for future growth all may be affected. The problem is exacerbated when large amounts of water are moved to another watershed because the basin of origin also loses the benefits of the return flows. A few states have enacted laws designed to restrict the movement of water from one watershed for use in another within the state. Such laws represent a departure from the original appropriation doctrine, which placed no limits on where water can be used. Restrictions to protect the basin of origin apply to new appropriations as well as to transfers of established rights. California depends on moving large quantities of water from water-rich areas to areas of high demand within the state. The state's area-of-origin protection law gives an exporting area an absolute priority to make future use of water over that of the importing area, and it reserves for the county where water originates all the water it may need for future development. However, as a practical matter, it would be difficult for a county of origin to halt long-standing water exports. The statute provides no procedures and criteria for doing so. Colorado allows conservancy districts to make transbasin diversions out of the Colorado River basin only if they will not impair or increase the cost of present or future water supplies for the exporting area. This has resulted in the building of special “compensatory storage” reservoirs in the Colorado River basin by districts that have imported Colorado River water. More recently, one district has made a variety of concessions and payments to mitigate problems raised by objecting parties in the basin of origin. (See the Windy Gap example discussed in Chapter 6.) Interestingly, there are no similar restrictions on the large cities that import most of the water that is moved be-

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Water Transfers in the West: Efficiency, Equity, and the Environment tween watersheds in Colorado. Montana has a law that requires state participation in all out-of-basin transfers. The size of transfers is limited, and the state is bound to consider public interest factors. State restrictions designed specifically to inhibit the transfer of water out of state are constitutionally suspect. The U.S. Supreme Court has ruled that because water can be essentially “an article of commerce,” states violate the commerce clause if their transfer regulations discriminate against interstate commerce (Sporhase v. Nebraska, 1982). Thus state regulation of water use must be evenhanded, treating water users within and outside the state basically the same. The state of New Mexico has struggled to fashion a set of constitutionally acceptable restrictions on transfers of ground water that will allay concerns about major appropriations of ground water for the benefit of El Paso, Texas (City of El Paso v. Reynolds, 1984), and the state has been able to prevent El Paso from obtaining a water right for out-of-state use (Tarlock, 1990). Public Interest Review Most States now require that appropriations of water must not be contrary to the public interest. The Utah Supreme Court has held that the same standard applies to a change of use (Bonham v. Morgan, 1989). Some legislatures have made the requirement explicit. Nevada requires rejection of a transfer application if it would be detrimental to the public interest. To make it more difficult for out-of-state applications to perfect water rights based on the Sporhase case, New Mexico extended to transfers its requirement that appropriations not be detrimental to the “public welfare.” In most states, administrative agencies simply apply the same standards relevant to new appropriations, including public interest requirements, to changes of use. Introduction of consideration of the public interest into the transfer process potentially extends protection to interests well beyond the legal interests of water rights holders. At this point, however, it is not clear how far state agencies will go in recognizing and protecting the interests of people without water rights. The basic idea, a corollary of the principle that all water must be used beneficially, has long been part of western water law, but states have seldom denied new uses or transfers because they contravene the public interest. Sporhase and the new compass of third party interests have stimulated a great deal of interest in the idea, and states are beginning to apply it. Practice varies from state to state. New Mexico, for instance, has always taken a narrow view of the public interest. When one lower

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Water Transfers in the West: Efficiency, Equity, and the Environment court held that the state engineer should consider the detrimental effects of a transfer on the culture and traditions of Hispanic rural communities, the decision was vacated by the state supreme court and the state engineer returned to his prior practice (In re Application of Sleeper, 1985). Arizona courts have interpreted the public interest as a basis for regulating ground water pumping in urban areas where that is a serious concern (Arizona Game and Fish Department v. Arizona State Land Department, 1975). Legislation rarely defines the public interest, much less the process for determining whether it has been adversely affected. In Idaho a vague directive to the director of the Department of Water Resources to determine whether a proposed water use (a new appropriation or a transfer) conflicts with “the local public interest” led the state supreme court to refer to similar language in other Idaho laws and to examine how other states define the public interest (Shokal v. Dunn, 1985). As a result, administrative hearings are now held to allow affected members of the public to present evidence to the director on matters such as aesthetics, recreation, fishing, and ecosystem functions. The objective is to reach a decision that secures “the greatest possible benefit from the public waters for the public. ” This involves considering not only the benefit to the applicant but also the economic effect, loss of alternative uses, minimum streamflows, waste, and conservation. Wyoming is one of the few states with a special review process for transfers. The review looks at economic losses to the community and state that offset benefits from the transfer and the availability of other sources of water. California, through its State Water Resources Control Board, reviews proposed transfers to see if they unreasonably affect the economy of the area from which water is transferred as well as fish, wildlife, and other instream uses. Instream Flow Protection In recent years, nearly all western states have enacted laws to protect instream flows. These laws are not targeted at transfers of water rights, but they can ameliorate the negative side effects of transfers by keeping some water flowing in streams regardless of what transfers occur. They may also accomplish the goal of securing instream flows by inhibiting transfers that would deplete a stream below the minimum protected under the instream flow law; instream water rights holders, usually the state, have standing to invoke the no injury rule in proposed transfers.

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Water Transfers in the West: Efficiency, Equity, and the Environment their reservations, it could disrupt established non-Indian economies or at least require them to seek new water sources. Despite the possible mutual benefits of many transfers of Indian water to off-reservation uses, objections are raised from time to time on both sides. Some Indians fear that conveyance of the right to use their water will limit future use of reservation lands and constrain their opportunities for cultural survival or economic growth. The fear is not without substance and argues for careful, well-informed tribal decisions. Non-Indians sometimes object that transfers of Indian rights could result in tribes' charging for the continuation of a supply that non-Indians are now getting for free. As long as the Indians lack capital to develop the water that is nominally theirs under reserved rights— funds for irrigation systems, storage reservoirs, and the like—the water is available to non-Indians. Some objections to proposals for compensated transfers are based on the argument that Indian rights can be used only on the reservation and any transaction that provided for off-reservation use would be unlawful as inconsistent with the purpose of the reservation. Of course, anytime Congress approves a transaction, it should moot the question of whether off-reservation use is permissible. The legal power of tribes to transfer water off the reservation remains unresolved in the courts, and Congress has chosen to deal with the issue in an ad hoc manner. Congress has approved a number of transfers of the right to use Indian water off the reservation in recent years in the context of negotiated settlements of Indian reserved water rights claims with states and non-Indian water users. Nearly all these settlements included provisions for limited marketing of Indian water. Early in the nation's history, Congress passed the Nonintercourse Act, making property transactions with Indians unlawful unless the United States approves or is a party. The act was intended to protect the tribes' perpetual rights in their lands. It also preserves the federal government's prerogative, exclusive of other nations and of the states or private parties, to extinguish Indian title to property when transactions occur and to regulate trading with Indians, a prerogative expressed in the commerce clause of the Constitution. It provides an opportunity for Congress to exercise what has been described in a number of Supreme Court decisions as a fiduciary relationship toward the Indians. Thus the United States oversees these transactions as a trustee for the tribes. The federal role in Indian property transactions and trade does not imply cutting off the tribes from commerce with neighboring economies. Indeed, reservations may depend on access to non-Indian markets for farm

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Water Transfers in the West: Efficiency, Equity, and the Environment goods, minerals, and industrial products. But the fact that Indian property is held in trust by the government does affect the legal requirements for transferring Indian lands and interests in land, including water. The full reach of the Nonintercourse Act has not been determined. At this point, transfers of rights to use Indian water by lease, sale of a quantity of water, or agreement of a tribe to defer using water so that it is available to others may not be secure without congressional approval. Many experts have urged legislation generally authorizing the lease of Indian reserved water rights to non-Indians. Congress has not, however, enacted such a statute. One possible enactment would be to allow tribes to lease water rights in a manner comparable to the leasing of reservation lands, which may be done under a statute requiring the approval of the Secretary of the Interior. If Congress passes such a law, it should include a process for reviewing the potential effects of such transactions on the reservation culture, economy, and ecology. It should be noted that (1) if the courts were to hold that Indian reserved rights cannot be transferred off reservation under existing reserved rights and (2) if a given transfer would adversely affect other holders of water rights, then (3) it presents a serious constitutional question whether Congress could grant the right to make such transfers in the absence of compensation to the losers. SPECIAL DISTRICT LAWS AND STATE LAW RESTRAINTS There are literally dozens of types of entities that develop and distribute water to individual water users. The earliest North American examples are the acequias, the community ditch organizations of the Southwest that are rooted in ancient Spanish custom. Many still operate in northern New Mexico, where they not only perform water distribution functions but also are often at the center of community life. Private entities that distribute water include mutual water companies and irrigation companies. In a mutual water company, rights are owned by the individuals who make up the company. Other companies hold rights directly, with the ownership interests of rights to use water evidenced by shares of stock. Although every type of water rights holding entity has a potential role in water transfers, the largest and most influential types of public entities that exercise water rights in the West are irrigation and conservancy districts. About a thousand entities known by a variety of names—irrigation districts, conservancy districts, water authorities, and the like— supply a large measure of the water in the West, most of it to agriculture. About one-third of all irrigated land is served by these districts,

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Water Transfers in the West: Efficiency, Equity, and the Environment but a much larger percentage of western water is under their control. In many cases, they manage federally financed projects and distribute the water from those projects to district members. The water rights held by a district belong to the district itself; members or residents of the district have contractual rights to use water. Districts have considerable promise for participating in and improving water transfer activities. Some districts have programs that move water freely within their boundaries according to the annual and seasonal needs of farmers and others, including municipal users. A well-known example is the Northern Colorado Water Conservancy District, which maintains a robust market, annually trading contractual rights to use district water among district members. (See Chapter 6.) The ability of special districts to transfer water often is constrained by state law. Many districts cannot transfer water beyond their own boundaries. In the Colorado Front Range, for example, the Northern Colorado Water Conservancy District holds far more water than it can use in the foreseeable future. As taxpayers, district residents must repay the high costs of developing the water, but the district and its member entities (irrigation companies and municipalities) are prohibited from selling it to growing municipalities surrounding the district who need water now. These water-short communities must then seek water from costly and sometimes controversial distant sources, such as transbasin diversions or expensive and environmentally questionable facilities like Two Forks Dam. Meanwhile, the district has sought ways to attract municipal growth to provide an in-district market for water. But seeking growth brings the district into conflict with some established municipalities within it, which have land use policies favoring slow growth to maintain the quality of life. Some states are addressing the tensions created by restrictions on out-of-district transfers by lessening or eliminating the restrictions. Colorado has authorized conservancy districts to lease water for use outside their boundaries, and Utah has removed all restrictions on transfers out of districts. With the lifting of transfer restrictions, water may move more freely to other areas, but there is no assurance that interests other than those of water consumers will be considered. Although absolute restrictions on district transfers err on the side of inhibiting beneficial transactions, there are sound reasons to examine carefully the consequences of removing water from one area and exporting it to another when public as well as private interests are at stake. Given the large amount of water controlled by special districts, it is important that state law address the question of what entity or

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Water Transfers in the West: Efficiency, Equity, and the Environment process should decide when, how much, and on what conditions water should move from one region to another. In Arizona, all transfers out of districts or watersheds where districts develop their water, even water not subject to district water rights, are subject to the veto of affected irrigation districts, agricultural improvement districts, and water users' associations. Yet these entities are charged with narrow purposes and were never intended to represent the social, economic, and ecological interests of a region. Often their governing boards are neither elected nor appointed in a politically responsive process. Decisionmaking on these matters would seem more appropriate at the county, regional, or state level. Nevada requires that review and comments be sought from county commissioners when a transfer that will remove water from the county is proposed, but recommendations are not binding on state administrative officials. The state public interest review statutes that exist in most western states are a potential, but largely unused, means for considering public issues surrounding water transfers from special districts. Districts are charged with responsibilities broader than the traditional functions of water development, conveyance, and storage, such as playing a role in conserving water and in preserving water quality. In some states, districts are assuming responsibilities for protecting public interests besides water supply. In Colorado, conservancy districts can administer programs to control nonpoint source pollution. Unless districts are given broader responsibilities than simply ensuring water supply, they cannot be expected to exercise their potential powers over transfers to accomplish other goals. OPTIONS FOR IMPROVING WATER LAW AND POLICY Public Interest Review Processes Even though all but one western state use some type of public interest review process in water decisions, all could improve their manner of reviewing the effects of water transfers. This is particularly true in state processes that concentrate the public interest review on new appropriations and give little attention to transfers. Most states lack clear standards for defining the public interest to be protected. Many of the social, economic, and ecological interests that are affected by moving water from one use or region to another are not included. Once the elements that constitute the public interest are identified, decisionmakers need state policy guidance to resolve conflicts among competing interests. Comprehensive water planning can serve to articulate both the elements of public interest and the state policies relating to them.

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Water Transfers in the West: Efficiency, Equity, and the Environment Public participation in review processes is essential in identifying the range of interests affected by a proposed transfer. Procedures vary widely from state to state, but most western states provide opportunities for people representing all the elements of the public interest as defined by state law to be heard. A few states, including Montana and Utah, still limit participation in transfer proceedings to those who hold water rights. Impact Assessment The National Environmental Policy Act requires the assessment of potential environmental impacts when major projects are undertaken. It applies to any proposal requiring federal approval or license or the use of federal facilities. A few western states, including California and Washington, have adopted laws establishing a parallel set of environmental review requirements for state-permitted or state-sponsored projects. State or federal laws requiring assessment of impacts are important devices for evaluating the effects of a proposed water transfer. The information is valuable in a fair and comprehensive public interest review. States lacking impact assessment programs could fill a significant gap in water decisionmaking by enacting such laws. Comprehensive Planning Most western states have some type of water plan. Few, however, have comprehensive planning processes that articulate established water policies in the context of issues that are likely to arise in transfer proposals. The policies and standards developed through comprehensive policy planning can inform the process for public interest review as well as processes for issuance of water rights permits and the development of projects. Planning processes that are essentially dynamic policy development programs exist in Kansas, Montana, and Oregon. Plans can cover the panoply of values and interests that are affected by water development, transfer, and use. They can discuss the relative importance to the state of water-related values and their impacts on rural communities, fisheries, wetlands, recreation, drinking water, and flood control. They can be designed as guidance documents for water rights holders and decisionmakers in transfers as well as other major water decisions, such as new appropriations, development projects, water quality standard setting, and instream flow protection programs. Thus predictability can be enhanced, costs minimized, and the full range of effects of transfers anticipated in a comprehensive state planning process.

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Water Transfers in the West: Efficiency, Equity, and the Environment Facilitating Third Party Participation in the Water Transfer Process State and tribal governments that make the rules regarding who may participate in the water transfer review process can go to varying degrees of effort to facilitate third party participation. An essential follow-up to decisions regarding which interests should be allowed to influence the process involves determining the appropriate degree of influence and considering how their participation can be made more effective. Government efforts to facilitate third party participation can include the following elements: Permission to be present and speak. The opportunity for public interest groups to be present at hearings and to state their opinions is implied in state laws that list various factors a state official or agency may consider in reviewing a proposed change in water rights—recreation, local economics, fish and wildlife, and so on. Legal ability to influence transfer conditions and to delay transfer approval. Without some bargaining power a third party interest cannot effectively influence the outcome of a transfer review process. Third parties' objections “count” when they can delay transfer approval, influence transfer conditions, or make the process more costly for transfer proponents. Transfer proponents then have an incentive to negotiate with third parties and seek to accommodate their interests. Other water rights holders clearly have such bargaining power under the no injury rule common to the western states. Third parties who do not hold water rights depend on general environmental and other regulatory statues to give them standing to object to transfers. Designated representation. A government agency can be assigned the task of representing an interest. For instance, some state game and fish departments have been assigned some responsibilities for assessing transfer impacts on instream flows. However, if the interest may be represented only by a specific government unit, this can effectively limit participation on behalf of that interest. Environmental groups may be especially effective representatives in a discussion of the environmental impacts of a proposed transfer. Financial and legal assistance. Economically disadvantaged third parties may need financial assistance to conduct investigations, to collect evidence regarding transfer impacts, and to hire attorneys or other experts. For instance, the federal government, in the context of its trust responsibilities to tribes, provides financial and legal assistance to tribes involved in litigation and

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Water Transfers in the West: Efficiency, Equity, and the Environment negotiation over water issues that affect tribal interests. Some state water agencies take an active role in preparing assessments regarding transfer impacts on other water rights, and this role could be extended to other third party impacts. Broader third party participation, at any of the levels described, will increase state and tribal government costs of reviewing proposed transfers, as well as transaction costs incurred by transfer applicants. States and tribes need to arrive at a balance between these increased costs and the benefits of broader and more effective third party representation. The federal government will also have to strike such a balance when specific policies and criteria are drafted for reviewing proposed transfers of federal project water. Judicial Public Trust Doctrine The public trust doctrine allows a court to reallocate vested water rights to protect trust values, which now include environmental protection. As applied, it prevents the allocation or transfer of water without adequate consideration of the consequences. It recognizes that water is, at base, a public resource and that private interests in it should further, not impair, public benefits from the use of water. The doctrine has its origins in civil and common law doctrines that recognize public servitudes (rights of passage) in tidal navigable waters and state ownership of the beds underlying navigable waters. In the nineteenth century the doctrine was expanded to place outside limits on the widespread practice of state grants of submerged lands so that they could be filled in. California has a long tradition of aggressive use of the trust to subject submerged lands granted by the state to private individuals to public rights of passage. These rights include commercial navigation, recreational use, and environmental protection. In 1983 the California Supreme Court applied the public trust to a lawsuit to curtail Los Angeles' appropriations from streams that fed Mono Lake (National Research Council, 1987) to preserve the lake's fragile ecosystem. National Audubon Society v. Superior Court (1983) held that the vested water rights of the city of Los Angeles could be retroactively limited to support trust values that were not adequately considered some 40 years earlier when the city obtained its rights. The doctrine has been accepted in more limited contexts in other state courts and widely studied throughout the West as a vehicle for judicial reallocation, but its forceful application is confined largely to California.

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Water Transfers in the West: Efficiency, Equity, and the Environment The committee believes that the values the public trust doctrine seeks to protect are best accommodated in comprehensive water planning processes and through public interest review of new appropriations and transfers. Rather than a technique or option for dealing with the effects of transfers, the public trust doctrine should be seen as a remedial device available to the public when there has been a failure of the system to protect the public interest. The doctrine applies ad hoc and lacks precise standards to judge how water should be allocated and used by competing users. No after-the-fact remedy can deal precisely or effectively with resource use and allocation, so the most valuable function of the doctrine is to signal the need for processes to avoid its judicial application (Graff, 1986). The recommendations suggested throughout this report are intended to address all values comprehended by the public trust doctrine and thus avoid the need for its selective application by the courts. Clean Water Act, Section 404 Almost any water diversion or storage facility involves filling wetlands and may require a Section 404 permit from the U.S. Army Corps of Engineers under the Clean Water Act. Because some type of structure or facility frequently is necessary for a water transfer to occur, there is a potential federal “handle” on transfer projects that opens the possibility of extensive, detailed federal reviews and conditions. Although the limits of Section 404 authority have not yet been defined, the federal government could use the 404 program to regulate the effects of transfers. To date, the federal government has not fully exercised its potential authority under the statute. Where state policies exist and are not in conflict with federal law, they can be implemented through the federal permitting process. It is the policy of the Corps of Engineers to follow state policy wherever possible. Therefore, to the extent that state law deals with the effects of transfers, it increases the chances that the federal government will not become involved. But in the absence of state policy, the Corps of Engineers and the Environmental Protection Agency will set their own policy for the state in the course of making Section 404 permit decisions. Ad Hoc Negotiation Many of the diverse effects of transfers can be dealt with in negotiations between affected parties and the parties to the transfer. This can occur with or without the benefit of laws to prod cooperation,

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Water Transfers in the West: Efficiency, Equity, and the Environment and it can include anyone the parties decide to admit to the process. The Windy Gap Project discussed in Chapter 6 is illustrative. Of course, parties with an arguable legal right under some statute and parties with access to legal mechanisms to delay or increase the costs of a project have the greatest bargaining power in such negotiations. The fundamental problem with negotiated resolutions that are not required by water transfer laws is that they produce uneven and incomplete results. Some parties will be treated better than others; some may be overlooked. Some transfers will entail high public visibility and political interest to empower affected parties; others will not. A consistent, reasonably predictable approach applicable in all transfers of significant size or impact will be more equitable and will encourage more desirable transfers. This argues for a formal process informed by impact assessments, comprehensive plans, and public interest reviews of particular transfers. Negotiated resolution of the issues in such a setting should be superior to ad hoc negotiations that vary with the political and economic power of the various parties. Other Legislation Although the transfer of appropriative water rights has always been possible, it is only recently, in the era of full appropriation of many western streams, that reallocation has become the main source of water for new enterprises. States and their citizens are realizing that voluntary transfers among private parties may affect an array of interests that are not adequately protected by the laws and processes that govern transfers. Western states, the federal government, and water districts all have opportunities and responsibilities to deal with the effects of transfers. The most direct way to do so is through programs of policy planning, impact assessment, and public interest review of projects. In addition, several other laws can deal with the effects of transfers. State instream flow laws are important for limiting the environmental and economic effects of transfers. The structure and administration of these laws may have to be modified so they can be integrated with transfer laws. Laws that treat instream flow rights like other appropriative water rights (as in Colorado) provide protection against the adverse effects of transfers through the normal operation of state water law and its no injury rule. But these laws can also be used more expansively. At minimum, wider purposes than fishery protection need to be served. Instream flow protection can be addressed by requiring a portion of salvaged water (as in Oregon and Washington) and other water that is the subject of a transfer to be

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Water Transfers in the West: Efficiency, Equity, and the Environment dedicated to flow maintenance. This would be an exaction similar to requiring land developers to dedicate land for streets, open space, or schools. Federal project water should be used in ways that are compatible with state instream flow laws, and transfers should be allowed only when these state laws are satisfied. Ultimately, protection of instream flows will depend on the acquisition of senior rights and the use of transfers to shift away from consumptive to instream flow uses. State water quality protection goals can be furthered in the transfer process if statutes and procedures are clarified to specify that purpose. Stricter controls of point source discharges, without the self-destructive provisions in some state laws that subordinate quality protection to an unfettered right to appropriate water, are needed. Nonpoint source pollution of water use should be examined and checked at the time a right is transferred. And limits can be placed on the quantity and manner of use if they degrade water quality. Laws allowing and encouraging special water districts to market water beyond their boundaries are generally beneficial. There should be mechanisms, however, for ensuring that public objectives beyond water supply are served by these transfers. Federal legislation consenting to the leasing or other use of Indian reserved water rights outside reservations should include a means of reviewing the impacts on the reservation culture, economy, and ecology. REFERENCES Arizona Game and Fish Department v. Arizona State Land Department , 24 Ariz. App. 29, 535 P.2d 621 (1975). Bonham v. Morgan, 102 Utah 2d, 788 P.2d 497 (1989). City of El Paso v. Reynolds, 597 F. Supp. 674 (1984). Crawford, S. 1990. Dancing for water. Journal of the West 32:265-266. Getches, D., L. MacDonnell, and T. Rice. 1991. Controlling Water Use: The Unfinished Business of Water Quality Protection . Boulder: University of Colorado, Natural Resources Law Center. Graff, T. 1986. Environmental quality, water marketing and the public trust: Can they coexist? UCLA Journal of Environmental Law and Policy 5:137. In re Application of Sleeper, No. RA 84-53 (N.M. District Court for Rio Arriba County 1985). MacDonnell, L. 1990. Transferring water uses in the West. Oklahoma Law Review 43:119. National Audubon Society v. Superior Court, 189 Cal. Rptr. 346, 658 P.2d 704 (1983). National Research Council (NRC). 1987. The Mono Basin Ecosystem: Effects of Changing Lake Level. Washington, D.C.: National Academy Press. Roos-Collins, R. 1987. Voluntary conveyance of the right to receive a water supply from the United States Bureau of Reclamation. Ecology Law Quarterly 13(4):773-878.

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Water Transfers in the West: Efficiency, Equity, and the Environment Salt River Water Users' Association v. Kovacovich, 3 Ariz. App. 28, 411 P.2d 201 (1966). Sax, J. 1990. The Constitution, Property Rights, and the Future of Water Law. Western Water Policy Project. Boulder: University of Colorado School of Law, Natural Resouces Law Center . Shokal v. Dunn, 109 Idaho State Supreme Court 330, 707 P.2d 441 (1985). Sporhase v. Nebraska, 458 U.S. 941 (1982). Tarlock, A. D. 1990. State groundwater sovereignty after Sporhase: The case of the Hueco Bolson. Oklahoma Law Review 43:27-49. United States v. California, 438 U.S. 645 (1978). United States v. Winters, 207 U.S. 564 (1908). Wahl, R. W. 1989. Markets for Federal Water: Subsidies, Property Rights, and the Bureau of Reclamation. Washington, D.C.: Resources for the Future. Western Governors' Association Water Efficiency Task Force. 1986. B. Driver, ed., Western Water: Tuning the System. Denver: Western Governors' Association. Western Governors' Association Water Efficiency Working Group. 1987. Water Efficiency: Opportunities for Action. Denver: Western Governors' Association. Willey, Z., and T. Graff. 1988. Federal water policy in the United States—An agenda for economic and environmental reform. Columbia Journal of Environmental Law 13:325.