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Whose Water Is It? By Russell S. Johnson Texas Water: An Overview
Water will be an element in nearly all due diligence examinations with regard to development, transfer or real property lending, just as environmental issues became a standard part of real property transfers beginning in the 1960’s and 1970’s. Access to water must be considered, even if utility service is nearby or historic use of ground or surface water has been demonstrated. Transfers of ownership of real property with surface water diversion rights or historic groundwater use still require verification of compliance with all applicable permit requirements. For real property transactions where the buyer/lender intends to rely on access to surface water, some limited review is required—verifying use and compliance with state permits. If the owner intends to change the location, type of use or any other aspect of the permit, a substantial effort may be required and the cost and risk should be thoroughly evaluated. Groundwater presents similar due diligence requirements with far different and often substantially varied rules, depending primarily on the location of the real property. After the 2001 legislative session, more than 70 groundwater districts exist throughout the state, more than 1/3 of them “new” and therefore in the process of organizing and adopting rules. The following article outlines the basics of surface and groundwater law, both statutory and judicial. While the big picture is emphasized in the following outline, all transactions should be scrutinized carefully for water issues. Surface Water The State of Texas holds title to surface water in trust for the public welfare. Motl v. Boyd, 116 S.W. 458 (1926); In re Adjudication of Water Rights of the Upper Guadalupe Segment, 642 S.W.2d 438, 445 (Tx. 1982). Section 11.021 of the Texas Water Code defines the surface water owned by the state to include the water of the ordinary flow, underflow and tides of every flowing river, natural stream and lake and of every bay or arm of the Gulf of Mexico, as well as the storm water, flood water and rainwater of every river, natural stream, canyon, ravine, depression and watershed in the state. In short, any channelized flow of water is deemed to be owned by the state. Diffused surface water is not state water. These are waters which do not flow in any defined water course but rather cross the surface of the earth in variant and unregulated ways. Diffused surface water is subject to capture and use by the landowner without obtaining permission of the state through a permit. The trick, of course, is capturing the water before it enters any type of creek, ravine, stream or river. Several Texas cases have also recognized that the water in an underground stream or the underflow of a surface stream is state water. Pecos County Water Control and Improvement District No. 1 v. Williams, 271 S.W.2d 503 (Tex. Civ. App.— El Paso 1954, ref’d, n.r.e.). A.H. Dennis, III et. al. V. Kickapoo Land Company, et. al., 771 S.W. 2nd 235 (Tex. App.— Austin 1989, writ denied). The history of the development of
surface water law and the right to use the water found in the rivers and
streams of Texas involves Spanish civil law, English common law and
appropriation pursuant to state statutes beginning with the 1889 Irrigation
Act. The 1913 Irrigation Act has been described as the beginning of an
organized system of water rights in the State of Texas. The 1913 Act
clarified that the doctrine of prior appropriation applied statewide, and
that all unappropriated surface water in the state was the property of the
state. The Act recognized pre-existing riparian rights, but precluded the
acquisition of riparian rights for lands acquired from the state after 1895.
For the first time, a Board of Water Engineers (the predecessor to the
current Texas Natural Resources Conservation Commission [TNRCC]) was
established to administer a water permitting system. The modern era of
surface water law was ushered in with the Water Rights Adjudication Act of
1967. Under the Act, all riparian and unrecorded users of water were
required to file claims with the Texas Water Commission (now the TNRCC).
Obviously, the legislation acknowledged prior appropriations recognized by
the Board of Water Engineers. Transfers of Surface Water Permits All rights to use surface water in the state are evidenced by permits or certificates of adjudication administered by the TNRCC. All such rights establish the amount that can be diverted, the purpose of use, pace of diversion and place of use. Transfers of real property with surface water rights is straightforward and uncontestable. However, if the owner of the right wishes to change any of the primary conditions of the permit—amount, purpose, locations of use or diversion — any transfer involving any change in these four conditions requires an amendment, which must be authorized by the TNRCC. Any existing permit owner (or any party with standing) claiming an adverse impact can require a contested case hearing. These types of permit amendments are often accomplished, but usually only after much expense and delay. Recent history indicates the process can take years and necessarily involve considerable expense (hydrologists and legal consultants) and substantial uncertainty. Even more complicated are proposed transfers of permitted rights to a location of use outside the river basin boundaries (an inter-basin transfer, in water jargon). Not only are numerous additional requirements established before such an amendment can be approved, the legislature in 1997 provided that once approved, the inter-basin transfer right would thereafter be the most junior right in the river. Since the pecking order in surface water diversion rights is the priority or seniority date (date of first use), this renders the transferred right extremely unreliable (first to be curtailed). The “water market” in surface water rights in Texas is therefore severely hampered by a regulatory framework that substantially discourages changing the place or purpose of use of any state water, particularly if it is to a location “outside” the river basin. Sections 35.002(5) and 36.001(5) of the Texas Water Code define groundwater as “water percolating below the surface of the earth”. Typically this is water which if withdrawn will be recharged and/or supplemented. There are two (2) other categories of sub-surface water which must be distinguished from percolating groundwater. Water which is part of the underflow of a surface river has been deemed by statute to belong to the state and is therefore categorized as “surface water” for purposes of regulation and conveyance. TEX. WATER CODE § 11.021. Likewise, as set out above, water which constitutes an underground stream is state, or “surface water” as well. As stated above, in the absence of contrary evidence, underground water is presumed to be percolating groundwater and therefore owned by the surface estate owner. Texas Company v. Burkett, 117 Tex. 16 296 S.W. 273 (1927). Pecos County Water Control and Improvement District No. 1 v. Williams, 271 S.W.2d 503 (Tex. Civ. App.—El Paso 1954, writ ref’d, n.r.e.). The “Rule of Capture” The rule that a landowner generally owns underground water is based on the application of the rule of capture, which provides that underground water belongs to the landowner that takes possession of it. First recognized by Texas in Houston and T.C. Railway Company v. East, 98 Tex. 146, 81 S.W.2d 279 (1904), the rule of capture has survived substantive attack after substantive attack. City of Corpus Christi v. City of Pleasanton, 154 Tex. 289, 276 S.W.2d 798 (1955). Friendswood Development Company v. Smith Southwest Industries, Inc., 576 S.W.2d 21 (Tex. 1978). While waste was prohibited, the Texas Supreme Court in Corpus Christi found the City’s usage to be beneficial, even though up to 70% of the water produced was lost prior to use. Common law limitations on the use of underground water were nonexistent. Indeed, all of the rule of capture Texas Supreme Court decisions hold that a surface landowner can use underground water even if it deprives adjacent landowners of access to historically utilized water. The farmer in the first case whose well was dried up by the railroad and the City of Pleasanton, whose water supply was threatened by Corpus Christi, had no remedy in court. The Supreme Court has just written the latest chapter in the continuing saga of the Rule of Capture in Texas. In Bart Sipriano, et. al. v. Great Springs Waters of America, Inc., 42 Tex. Sup. Ct. J. 629, the Supreme Court considered an appeal from the Court of Appeals, affirming a trial court’s summary judgment in favor of the Defendant in a suit brought by adjoining land owners claiming the right to recover damages associated with the Defendant’s alleged malicious and negligent pumping of groundwater. Plaintiffs sued, alleging the Defendant, Ozarka, began pumping 90,000 gallons of groundwater per day, seven days a week, from land near the Plaintiffs. Soon after this pumping began, the plaintiffs alleged their groundwater wells were severely depleted. Plaintiffs alleged the right to recover actual and punitive damages for Ozarka’s alleged nuisance, negligence, gross negligence and malice. Ozarka moved for summary judgment which was granted by the trial court and affirmed by the Court of Appeals. On appeal to the Supreme Court, the adjoining landowners focused their argument on the suggestion that the rule of capture should be abandoned by the Supreme Court. After reviewing the history of the rule of capture in Texas, and the court’s recognition of the legislature’s power to regulate groundwater in Barshop vs. Medina County Underground Water Conservation Dist., 925 S.W.2d 618 (Tex. 1996) the Court noted that it had consistently recognized the need for legislative regulation of water. The Court said: Today, again, we reiterate that the
people have constitutionally empowered the Legislature to act in the best
interest of the State to preserve their natural resources, including water.
We see no reason, particularly because of the 1917 constitutional amendment,
for the Legislature to feel constrained from taking appropriate steps to
protect groundwater. In deferring to the Legislature, the Supreme Court made particular note of the provisions of Senate Bill 1, giving more authority to locally controlled groundwater conservation districts to regulate and limit usage, establish requirements for groundwater withdrawal permits and regulate water transferred outside the district. The concurring opinion by Justice Hecht, joined by Justice O’Neill, presents a slightly different view. While agreeing to defer to the legislature, Justice Hecht makes a persuasive argument for the abandonment of the rule of capture in favor of the “beneficial purpose doctrine” set out in Section 858 of the Restatement (Second) of Torts, which would impose liability for withdrawal of groundwater which unreasonably causes harm to neighboring land through lowering the water table or reducing artesian pressure, or for water use that exceeds the landowners reasonable share of the annual supply or total store of groundwater, or has a direct and substantial effect upon a water course or lake and unreasonably causes harm to a person entitled to use its water. Justice Hecht then states: While neither section 858, nor any other common law rule of water regulation is preferable to almost any effective legislative solution, absent such a solution, section 858 is preferable to the rule of capture. Nevertheless, I am persuaded for the time being that the extensive statutory changes in 1997, together with the increasing demands on the State’s water supply, may result before long in a fair, effective and comprehensive regulation of water usage that will make the rule of capture obsolete. I agree with the Court that it would be inappropriate to disrupt the processes created and encouraged by the 1997 legislation before they have had a chance to work. I concur in the view that, for now—- but I think only for now—- East should not be overruled. (emphasis added). Senate Bill 1 added Section 36.122 to the Texas Water Code authorizing regulation of transfers of groundwater out of a “district.” Subsection (a) provided: (a) A district may promulgate rules requiring a person to obtain a permit from the district for the transfer of groundwater out of the district to: (1) Increase, on or after March 2, 1997, the amount of groundwater to be transferred under a continuing arrangement in effect before that date; or (2) Transfer groundwater out of the district on or after March 2, 1997 under a new arrangement. Subsection (d) then established the criteria the district must use in determining whether to issue a permit. The district was to consider: i. The availability of water in the district and in the proposed receiving area during the period for which the water supply is requested; ii. The availability of feasible and practicable alternatives to the applicant; iii. The amount and purposes of use in the proposed receiving area for which water is needed; iv. The projected effect of the proposed transfer on aquifer conditions, depletion, subsidence, or effects on existing permit holders or other groundwater users within the district; and v. The approved regional water plan and certified district management plan. It should be noted that transfers from the property where the water was produced were not deemed in need of regulation, only those where the use is “outside” the district. It is also important to consider how infrequently a district’s boundaries and an aquifer’s boundaries coincide. The empowerment of groundwater districts accomplished in SB-1, together with the emphasis on long-range planning mandated by the 1997 legislation, led to a flurry of proposed groundwater districts being presented to the 76th Legislature. At least 22 separate groundwater districts, proposed in most cases with boundaries based on political geography, not groundwater boundaries, were authorized by legislation passed by the House and sent to the Senate. Senate Natural Resources Committee Chairman, Buster Brown, held the bills authorizing these districts in committee, expressing concern over the scattered creation of groundwater districts, the goals of district sponsors, and the potential disruptions of the SB-1 planning process. Indeed, the San Antonio Water Systems transactions with Alcoa and its sister agency, City Public Service Board of San Antonio, generated substantial debate about the need for groundwater districts in the counties where the water resources for these projects are located. At the end of the session, the
Senate agreed to a compromise whereby the majority of the districts proposed
were temporarily created subject to reconfirmation by the 77th legislature.
Most of these districts were proposed to protect “local” groundwater
from the perceived threat of “transfers” of water to areas “outside”
district boundaries, again, even though usage often crossed the district’s
political boundaries. The conflict between landowners rights and a
district’s right to regulate appeared centered on “transfers.” Senate Bill 2 These circumstances led to an intense examination of groundwater issues by the House and Senate Natural Resources Committees in anticipation of the 77th legislative session and set the stage for Senate Bill 2 (SB-2). Interim charges studied prior to the session included specific examination of the rule of capture and the role of groundwater districts. The stage was set for an epic battle between groundwater districts (and political and geographic areas)with a strong desire to protect their existing and future use in their area and landowners’ rights under the rule of capture. For over 90 years landowners had relied on the rule of capture to enter into transactions involving the use of water somewhere other than the land from which it came. See Bartley, Texas Company, City of Corpus Christi and Bart Sipriano, supra. Now groundwater districts (more than 70 districts throughout the state) were seeking the power not to manage and protect the resource, but to limit and restrict transfers. SB-2 strikes a brilliant compromise between these two opposite positions. All groundwater districts will have the power to manage the resource and transfers, but only if the rules are the same without regard to where the water will be used. In addition, SB-2 makes numerous changes to Chapters 35 and 36 of the Water Code, streamlining the process leading to regulation of groundwater. Most importantly, provisions exempting domestic and livestock wells have been substantially narrowed (for instance, none allowed on a tract of less than 10 acres). SB-2 amends and clarifies the power of groundwater districts to regulate groundwater production, the means and methods by which those limits may be imposed, and the district’s ability to regulate transfers of groundwater outside district boundaries. Senate Bill 2 amends Texas Water Code § 36.113 by adding a new subsection which provides: e) The district may impose more restrictive permit conditions on new permit applications and increased use by historic users if the limitations: 1) apply to all subsequent new permit applications and increased use by historic users, regardless of type or location of use; 2) bear a reasonable relationship to the existing district management plan; and
3) are reasonably necessary to protect existing use. This provision directly addresses the delicate interplay between protecting existing use by regulation and allowing the exercise of the ownership right by landowners proposing new or increased use. Groundwater districts may under this provision impose more restrictive conditions if they are wiling to impose those conditions on all new users and existing users proposing to increase their historic use. By necessity, decisions concerning the fairness of such limitations will be made considering the needs of all users and landowners within the district. Senate Bill 2 amendments to Section 36.116 of the Texas Water Code further clarify a district’s power to regulate production of groundwater by establishing the methods that may be used by the district, from distance requirements between wells and size limitations to limits to the amount of water that may be produced. Senate Bill 2 also adds a section recognizing that a district may manage to preserve historic use (presumably to the detriment of future or new use) so long as these efforts are consistent with the district’s comprehensive management plan required under Texas Water Code § 36.1071. Clearly, this right is subject likewise to the provisions of Section 36.113, requiring that limits imposed on new users be applied to all new users and existing users proposing to increase their historic use. Perhaps the most fundamental changes contained in SB-2 addressing groundwater are amendments to Section 36.122 of the Texas Water Code. This section addresses the authority of groundwater districts to regulate transfers of groundwater out of the district. In summary, these amendments prohibit a district from imposing more restrictive permit conditions on transporters than the district imposes on in-district users, and prevents a district from denying a permit based on the fact that the applicant seeks to transfer groundwater outside of the district, with the recognized exception in Section 36.113(e) that may authorize the imposition of more restrictive permit conditions if the district is willing to impose those more restrictive permit conditions on all new users in the future, and all existing users proposing to increase their historic use. These provisions, for the first time, establish the framework within which proposed water transfers may be objectively analyzed. Stated another way, the legislature has made it clear that it is not the district’s responsibility to determine the appropriate location of use of groundwater produced within the district, but rather require the district to manage the resource for the benefit of (or to the detriment of) all landowners and existing users within the district. While limiting the district’s ability to deny or prevent transfers, Senate Bill 2, for the first time, clearly authorizes the district to impose a surcharge fee for the export of groundwater outside district boundaries. The fee can be calculated using one of the following statutory methods:
Under these provisions, districts are clearly authorized to obtain a disproportionate share of their fee revenue from producers of groundwater that transfer the groundwater outside the district. However, their willingness to impose such penalties is constrained by the fact that surcharges are directly related either to the district’s tax rate or the district’s user fee, requiring the district to either raise its tax rate or user fee to its in-district users to impose a higher surcharge. A buyer of water seeking to transfer that groundwater out of the district will know with certainty that the total fee costs associated with the transaction will be no more than one hundred fifty percent of the existing district user fee or the existing district tax rate times one thousand gallons in calculating the economics of the proposed transfer. Senate Bill 2 also adds provisions addressing the minimum period for which authorizations to transfer must be established (three years to begin construction, 30 years if construction has been initiated prior to the issuance of the permit) and providing for district review of the amounts transported, subject to the limitations in Chapter 36. New subsection (l) of Section 36.122 prohibits the district from using revenues obtained as surcharges to prohibit the transfer of groundwater outside the district. Senate Bill 2 also clarifies a groundwater district’s authority to set fees by amending Section 36.205 of the Texas Water Code. These amendments authorize a district to assess production fees based on the amount of water authorized by permit to be withdrawn or on the amount actually withdrawn. The authorization to assess fees is in addition to any authorization to levy a tax if the district was created after September 1, 1999, unless otherwise authorized. Senate Bill 2 amendments also adjust the ratio between authorized user fees for agricultural use and those for any other purpose by providing a $1 per acre foot limitation for agricultural use and a $10 per acre foot limit for water used for any other purpose. SB-2 amendments also clarify that a district may assess a production fee on water produced from exempt wells, if that water is subsequently sold. Senate Bill 2 has substantially
revised and improved the law related to the powers of groundwater districts
in the State of Texas. This is particularly important given that at least 38
new groundwater districts were created or ratified in the 77th Legislative
Session, many out of concern that “their” groundwater might somehow be
threatened by landowners in the region producing groundwater for transfer
outside the district. The focal point of issues regarding groundwater in
Texas has been and will be related to transfers or movement of groundwater
throughout the state. I believe that the uncertainty and problems associated
with the water market in groundwater have substantially diminished, that
most issues have been resolved, and that a market in groundwater will grow
as certainty is provided by groundwater district rules. The resources and
powers available to groundwater districts are adequate to deal with the
problems that groundwater production creates within their district. It is
important that groundwater districts manage groundwater production not with
a view to the location or desirability of any particular use, but with an
eye to the rights of the landowners, which have been preserved by the courts
for nearly one century. Water resource development issues in Texas should
not be an “us v. them” analysis, but rather should be viewed as resource
development issues critical to the future of all Texans. What Is It Worth? The burning question on everyone’s mind is: How much is water worth? While it seems a simple question, the answer depends on so many variables that it cannot be answered without a frame of reference. Examination of other areas of the country where the water market has operated historically provides little guidance in valuing water resources in Texas. There are a myriad of ways of valuing water and treatises have been written on preferred models for determining how water as a commodity should be valued. Obviously, one can look at the economic benefit derived from the use of the water, and value the water accordingly. This creates a wide disparity in the value of water used for commercial or industrial purposes vs. domestic or agricultural. Indeed, this wide disparity raises concern among agricultural and rural interests, given the inevitable economics of commodities moving to the highest willing buyer price; substantially more in the case of industry or water purveyor use. Indeed, it has been estimated that the same amount of water that supports ten agricultural jobs would support 100,000 high tech jobs. While economic benefit analysis is a factor, many other issues affect water value in Texas, not just its current use. Texas law prevents any kind of statewide analysis of unit value of water. For instance, permits to withdraw water from the lower Rio Grande have been transferred throughout the lower Rio Grande Valley for the last thirty years, and prices are reasonably well-defined. Similarly, a market has emerged in transferred Edwards Aquifer permit rights which have been leased and purchased for the last several years. Lease prices range from $70 to $80 per acre foot per year, while permanent acquisitions or transfers have been accomplished at $700 an acre foot in both areas. Rights are easily transferred from one location to another. Cities in the Panhandle and West Texas have either purchased real estate or acquired the right to produce water from real property by payment of some unit price to the landowner. These prices have varied from very low numbers ($7 per acre foot) to reported numbers approaching $100 per acre foot. Many variables affect the value of groundwater owned by the surface landowner. Obviously, the location of the land in relation to a potential demand or buyer plays a huge role in the value of the water. The capital cost of facilities necessary to extract and deliver the water and the operating costs of the those facilities also play a large role. Sustainability of production likewise is a factor or variable in determining the value of the groundwater resource. Numerous other factors affect value, including the existence of a groundwater district and the nature of rules regulating production, historical vs. projected use, impact on the resource and Sustainability of the production. Water quality is also a huge variable. Nature and extent of treatment required can radically alter the value of a water resource to a potential buyer. As attorneys for the City of San
Antonio, we have seen the city presented with a myriad of opportunities to
acquire water under a variety of scenarios and circumstances, and therefore
prices. The City has entered into an agreement with Alcoa and has purchased
water rights owned by its sister city agency, the City Public Service Board,
and Lee, Bastrop and Milam Counties, as indicated previously. The water
rights acquisition from CPS was an outright purchase for cash and future
payments valued at approximately $4 million for land that could produce
15,000 to 20,000 acre feet of water per year over a substantial period of
time. The Alcoa contract contains a raw water charge which will be paid to
Alcoa for each acre foot of water extracted. The per-acre foot unit cost
begins at $50 per acre foot and escalates during the term of the contract to
reflect the future value of water. San Antonio has entered into two smaller
groundwater delivery contracts from landowners in Northwest Bexar County.
Although structured differently, San Antonio will pay the landowners a unit
cost for water delivered. In one contract, the landowner will make all
capital investments necessary to deliver the water to a delivery point in
the San Antonio Water System structure. San Antonio will pay $300 per acre
foot for this delivered water (requiring no treatment). In a nearby
location, San Antonio will invest the capital in the facilities necessary to
extract and deliver the water on the land and pay the landowner a unit price
of $150 per acre foot. These unit prices reflect the location, ease and
quality of the water for delivery to the San Antonio Water System. What is the Future of the Water Market? Recognition by the state and its citizens of the value of water will propel and fuel an emerging market in water resources. Governmental limitations on this market generally will frustrate, impair or artificially inflate the cost or value of water and must, over time, be reduced or eliminated. Restrictions on movement of surface water through ridiculous requirements for approval of interbasin transfers devalues historical, senior surface water rights throughout the State of Texas. Landowners with these permits cannot obtain their real value in today’s Texas water market. Groundwater resources likewise can be devalued by governmental restrictions or regulations in the form of groundwater district rules limiting or prohibiting (or punishing through fees) export of water from the district. These types of rules are a direct threat to landowners realizing the true value of the water resources they clearly own under Texas water law. Ironically, ground water district rules and jurisdiction provide the only real certainty in ensuring long term access to ground water from a location other than where it will be used. The rule of capture provides very little assurance that last year’s production will be available 20 years after the investment is made. It is reasonable to assume that there will be a renewed focus on development of groundwater resources. We are beginning to see the development of landmen securing leases, promising landowners royalty payments when deals are struck. Real estate transactions are occurring that have more to do with water than with surface estate. Land owners’ ability to participate in the market will be highly variable depending upon numerous factors, including whether the water has been produced by the landowner historically, the size of the area, the productivity of the resource, proximity to demand and existence of a protectable and sustainable right. Texas is decades away from a commodity-priced water market. Lacking any transmission/pipeline delivery system, the state will continue to rely on water utilities, authorities and river authorities to create viable projects to meet anticipated future demands. Transactions and projects will help alleviate future demands, but organized, centralized or commodity-based selling and buying of water is impossible to achieve in the current regulatory and legal environment.
© 2001, Legal Assistants Division State Bar of Texas |
Generally,
ownership of water is directly related to its source and type. It can be
generally said that under Texas law, underground water belongs to the owner
of the surface estate, while surface water belongs to the State of Texas and
may be only used by the landowner with the State’s permission. Bartley v.
Sone, 527 S.W.2d 754 (Tex. Civ. App.— San Antonio 1975, writ ref’d
n.r.e.). In the absence of contrary evidence, underground water is presumed
to be percolating groundwater and therefore owned by the surface estate
owner. Texas Company v. Burkett, 117 Tex. 16 296 S.W. 273 (1927). Pecos
County Water Control and Improvement District No. 1 v. Williams, 271 S.W.2d
503 (Tex. Civ. App.—El Paso 1954, writ ref’d, n.r.e.).