RiverBank: Water Trusts in the Western United States

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by Amy W. Beatie, Executive Director, Colorado Water Trust

WHAT IS A WATER TRUST?
For well over a century, the prior appropriation doctrine has determined how water is allocated in the Western states. Based on the principle of “first in time, first in right,” prior appropriation allows the first person who puts water to a beneficial use a right to continue that use without interference from those who began using water later. The doctrine historically required that to obtain a defensible water right, one had to remove water from the stream system through a diversion. Primarily during the summer peak growing season, but also at other times of year, these legal water withdrawals stress the flow levels in stretches of many Western streams and rivers, forcing them to run critically low–and indeed sometimes dry–imperiling aquatic ecosystems.

To mitigate these effects, every Western state maintains some form of instream flow program, a program that entitles water that remains in rivers to the same attributes of a diversionary water right, namely a defined volume, a place of use, a season of use, and a defensible priority, in order to protect streamflows.

In addition to instream flow programs, the use of acquisitions, leases, soft-management solutions (changing points of diversion, changing from surface to groundwater diversion, changes in timing of releases), structural solutions (delivery and discharge works renovations), and other incentive-based approaches to streamflow enhancement are improving the way streamflows are protected and improved in Western states. These efforts are being pursued by water trusts throughout the West.

Water trusts, generally nonprofit organizations recognized as public charities under Section 501(c)(3) of the Internal Revenue Code, have been formed to help restore flows for existing habitat while working with water users to maximize the benefits of their water portfolios. They do this by encouraging voluntary, market-based transactions to put more senior, more defensible, more reliable water back in stressed segments of rivers while offering at the same time an alternative to selling water to, say, municipalities or local development.

A water transaction program offers a free-market choice for repairing streamflows. Because water trusts do indeed offer a voluntary solution to stresses on streamflows and a financial benefit to water rights holders–a combination to which many water users are responsive–they are being formed all over the West.

How Water Trusts Work: A Focus on Colorado’s Instream Flow Program, the CWCB, and CWT
Many water trusts must work in collaboration with a state administrative agency. In some cases, the water acquired by a water trust may only be held by a state agency if it is to be used for instream flows. Colorado’s instream flow program is housed within a state agency, the Colorado Water Conservation Board (“CWCB”), whose mission is “to correlate the activities of mankind with reasonable preservation of the natural environment” and “to preserve or improve the natural environment to a reasonable degree.” To accomplish this mission, the CWCB adds water to the instream flow program in two ways. The first is through appropriating new water rights for particular stretches of river. Currently, the instream flow program stewards more than 1,500 appropriations protecting nearly 8,500 river miles. This is an incredible network of protected streams and rivers. But the CWCB’s instream flow appropriations are quite junior; they cannot prevent the de-watering of stream reaches by senior water rights located above or in the instream flow reach.

Of course protection from further decreases in flow for an already stressed segment of river has its benefits, but if improving streamflows is part of the plan, another tool must be used. The second arrow in the CWCB’s quiver is the acquisitions program. Acquisitions are an important mechanism by which the CWCB preserves or improves streamflows in critical areas of the state. An acquisition has at least two benefits that are not available to the appropriations program. First, the acquisitions program matches willing sellers (or lessors) with a willing buyer (or lessee). As a result, it represents a market-based approach to protection of streamflows. Second, it provides the CWCB with access to senior water rights.

Under the acquisition program, the CWCB can acquire water, water rights, or interests in water to preserve or improve the natural environment to a reasonable degree. In addition to obtaining fee simple title to a water right, the CWCB may negotiate two types of temporary arrangements. The first, created under House Bill 03-1320, is what is now called the 3-in-10 lease program, which allows for temporary use of water rights in the instream flow program. The second, created under allows the CWCB to enter into longer-term arrangements for use of existing water rights as instream flows.

Once it has determined to accept a water right into the instream flow program, under almost all circumstances, the CWCB must apply to water court to obtain a decreed right to use the water right for instream flow purposes. The water court ensures that no injury will result to other water users from the change.

Of the CWCB’s two instream flow arrows in its proverbial quiver (appropriations and acquisitions), the acquisitions program is the less utilized. There seem to be several reasons for this. Running an acquisition from start to finish is a more time-consuming process than the initiation of an appropriation. Among other time-consuming efforts, it requires identifying willing sellers in areas identified as critical stream reaches, conducting an engineering analysis to determine the utility and health of the water right for sale, conducting a title analysis, allowing for the time to negotiate and execute the acquisition, preparing for the CWCB’s acceptance process, and running a water rights change application through water court. The CWCB has lacked adequate staff time to target, negotiate, and process transactions. Although institutional capacity is a factor that contributes to the lack of acquisitions conducted by the CWCB, by far the biggest hurdle is consistent funding. Until 2008, the CWCB relied upon donations, and was thus unable to provide incentives to a water users to place water rights in the acquisition program.

The Colorado Water Trust was formed to help with this issue. In essence, CWT works as a broker of water rights for the CWCB. CWT relies on and works together with the state’s instream flow program; the state gains benefits from the work CWT does in the form of increased acquisitions. CWT targets (or responds to offers of) water, negotiates the deals, processes the instream flow water right transactions, raises the funds, puts together an acquisition package, and then contributes the water to the instream flow program.

Challenges and Opportunities in Colorado
Opportunities
The instream flow program now benefits from a series of new tools. These tools create increased opportunities for the program.

The first two were mentioned earlier: House Bill 03-1320 and House Bill 08-1280. Both work to allow short-term use of water in the instream flow program while minimizing penalties to water users who enter into leases. The new protections help preserve the value of the water right for the lessor, yet still allow the CWCB to pursue terminable uses of water for instream flow purposes.

The lack of funding issue has also been addressed in the form of four legislative solutions, all from the 2008 and 2009 legislative sessions: (1) an appropriation from the Severance Tax Trust Fund Perpetual Base Account in the amount of $1 million for water rights acquisitions (contained in House Bill 08-1346); (2) $500,000 from the Species Conservation Trust Fund (from Senate Bill 08-168); (3) a $500,000 allocation from the Colorado Division of Wildlife’s Habitat Stamp program (Senate Bill 09-235); and (4) the Instream Flow Tax Credit Program (House Bill 09-1067). The new $2 million of funding and the Instream Flow Tax Credit program are new and significant incentives for ISF water rights projects.

Challenges
Current challenges the CWT faces include lack of information, difficulty with contract terms and transaction complexities, and dry up, among other issues.

Finding water for sale can be hard. CWT has been working on water transactions since 2001 and water is certainly available to acquire, but CWT has found that the “low-hanging fruit” is the most available. For example, water rights that are close to being abandoned are offered fairly regularly. High-volume, senior water in critically water-short stream reaches is harder to find, and harder to afford. In addition, limited market information to assist in determining price adds to the challenge.

Another reason water rights deals for instream flows can be challenging is that there are no set standards for the terms of the transfer. The terms are negotiated among the parties. As a result, there are limitless permutations and combinations of contract terms, some that make little difference to the transaction, and others with very real consequences.

Furthermore, unlike a more typical water rights transfer an analysis of the suitability of the water right for instream flow purposes must also be conducted. If there is an existing instream flow on the reach where the acquired water is to be used, we must consider the priority date of the instream flow appropriation, the location of the instream flow reach, the amount decreed, the type of natural environment preserved, the water availability to the instream flow, whether there are multiple flow periods or a terminus at a headgate, and whether the decreed amount for the instream flow is already adequate or has been reduced from original biological recommendation based upon a water availability analysis. The offered water right must also be examined for its potential use. These analyses must be conducted in addition to the regular investigations conducted when a water right is to be transferred.

Another challenge is the complexity of the process to change a water right to instream flow use. Every water acquisition for instream flow purposes must have the approval of the CWCB in addition to a change of water rights decree that adds instream flow as a beneficial use or permanently changes the use of the water to instream flow. The CWCB has its own rules, required investigations, and procedures for the acceptance of a water right for instream flow. This preliminary process is time-consuming and, if pursued by an individual, could be quite costly and overwhelming.

The next step is water court. With the exception of a 3-in-10 loan, any water use, including HB 1280 leases, must go through water court. This is perceived as a complicated, expensive, uncertain, and even risky process. It has been invoked often as a reason a water user does not want to place water in the instream flow program.

In Colorado, as previously explained, a change of water rights cannot injure other water users. One way to prevent injury is to distill the water right to its historical consumptive use and allow only the historical consumptive use to be changed. That way, a water user cannot expand his or her previous use to the detriment of other water users in the system. Typically, with irrigation rights, a change of water right will require the dry-up of irrigated land. In addition to being unpopular in general, many water users do not realize that this must happen.

Conclusion
In conclusion, water transactions to improve streamflows are not likely to solve all of the West’s streamflow problems or fit the needs of every water user. However, as economically rational, equitable, environmentally sound, and sustainable as instream flow water transactions are, they represent a step–and a pretty good one–in the right direction.