NATURAL RESOURCE AND ENVIRONMENTAL LAWWATER LAW

Chad J. Lee is an associate at Balcomb & Green, P.C. in Glenwood Springs, Colorado. He practices water, real estate, oil and gas, and land use law. Sara M. Dunn is a partner at Balcomb & Green, P.C. who specializes in water law.

Colorado law preserves the historical consumptive use of a water right during a lease to the Colorado Water Conservation Board for instream flow purposes so long as a change decree is obtained. The water is fully consumable downstream of the instream flow reach.

Preserving Historical Consumptive Use During Water Leases for Instream Use
by Chad J. Lee and Sara M. Dunn In 2008, the Colorado legislature eliminated a major impediment to Colorados instream flow program by enacting House Bill (HB) 08-1280, which allows owners of water rights to preserve the historical consumptive use of a water right during a lease to the Colorado Water Conservation Board (CWCB).1 This law gives the CWCB a useful tool to increase stream flows and preserve the natural environment. It also allows practitioners to preserve the value of clients water rights while benefitting the natural environment. This article provides a brief history of Colorados instream flow program, discusses the mechanics of HB 1280 leases, and analyzes the potential impact of HB 1280.

A Brief History of Colorados Instream Program

Before 1973, Colorado did not recognize instream flow rights.2 The Water Right Determination and Administration Act of 1969 defined appropriation as the diversion of a certain portion of the waters of the state and the application of the same to a beneficial use.3 Diversion meant removing water from its natural course or location, or controlling water in its natural

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course or location, by means of a ditch . . . or other structure or device.4 However, legitimized in 1973, the flow legislature rights by instream

right to access streams or condemn rights of way.9 The program gained momentum in the 1980s, partially as a way to stave off federal intervention.10 Although the CWCB had been authorized to acquire water for instream flows since 1973,11 the legislature clarified the law in 1986 to empower the CWCB to acquire senior rights for instream flow purposes by grant purchase, bequest, devise, lease, exchange, or contractual agreement.12 The CWCB clearly had the authority to acquire senior existing rights for instream flow purposes in the private market. In 2002, the Colorado legislature declined to enact certain provisions of a bill that would have allowed private individuals to hold instream flow rights.13 The legislature preferred to restrict ownership of instream flow water rights to the CWCB to balance competing interests.14 Proponents of the bill, however, struck a compromise that expanded the CWCBs authority to appropriate instream flows to improve the natural environment, whereas previously the CWCB had the authority to appropriate only the bare minimum flows to preserve the natural environment.15
CWCB Program

eliminating the need to divert water to obtain a priority.5 In so doing, Colorado recognized the need to correlate the activities of mankind with some reasonable protection of the natural environment and authorized the appropriation of instream flows.6 The CWCB was appointed as the exclusive authority to appropriate minimum flows and lake levels to preserve the natural environment to a reasonable degree.7 In 1979, the Colorado Supreme Court upheld the constitutionality of the instream flow program.8 Two years later, the legislature passed a compromise bill that added four principles and limitations the CWCB was required to follow in establishing instream water rights. These principles and limitations are: (1) instream flow rights could not constrain the use of imported water; (2) instream flow rights were subordinated to any water uses and exchanges existing prior to the instream right, even if not yet decreed; (3) the CWCB must make independent findings that the environment will be preserved to a reasonable degree; and (4) a clarification that the program did not create a public

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The CWCB uses two primary tools to improve streamflows: appropriations and acquisitions.16 Acquisitions, in contrast to junior post-1973 appropriations, enable the CWCB to acquire senior water rights permanently through gifts or sales, temporarily through leases, or through other interests. Acquisition is the less-used of the two tools due to the complexity of water transactions and lack of funding, and leases were not used at all due to the penalty incurred in the historical consumptive use of the water right.17 However, in 2008, the legislature eliminated a major impediment to leases of water rights for instream purposes.
The 2008 Amendment: HB 08-1280

even if the CWCB were to judicially change a leased water right to instream flow use, this nonconsumptive use likely would have been factored into a future historical use analysis as a period of nonuse, thereby reducing the value of the water right.19 The value of any water right is dependent on its actual historical beneficial use. Water rights can be transferred or sold, but only to the extent the water has been actually historically beneficially used.20 Historical periods of nonuse or undecreed use reduce the amount of transferable water to protect junior appropriators.21 The general practice in water court is to factor in a zero for each year that a water right lies dormant or is used for an undecreed or nonconsumptive purpose, for reducing instream the flow.

In

2008,

the

legislature

allowed

amount of water available for any changed purpose, including Periods of nonuse or nonconsumptive use therefore reduce the market value of the water right. This means that although the CWCB has been authorized to acquire water rights by lease since 1973, the risk of reduced historical consumptive use of a water right stifled the lease market completely.22 However, in 2008, the legislature enacted a provision that preserved the value of a water right during a lease to the CWCB for nonconsumptive instream flow purposes.

appropriators to claim historical use credit for periods during which the water was leased to the CWCB for instream flow purposes. Previously, no appropriator was brave enough to lease water to the CWCB because of the risk that the historical consumptive component of usethe a water transferable rightwould

gradually atrophy throughout the lease term. This risk was present because a water right must be used for its decreed purposes at its decreed place of use, without waste, to be transferred.18 Further,

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or more of the following: the historical

Historical Consumptive Use During Lease Term

location of return flow; the length of the existing instream flow reach, where applicable; whether an existing instream flow water right relies on return flows from the water the right proposed to for be acquisition; environment

HB 1280 allowed appropriators to claim consumptive use credits during lease23 periods for instream flow purposes, as long as the CWCB obtains water court approval of the new use.24 This occurs in three phases: 1) the CWCB evaluates the water right for instream flow purposes; 2) the CWCB actually acquires a non-fee interest in the water right by execution of a written agreement approved through a formal public process; and 3) the CWCB files for a change in water court to recognize the new instream flow use. Evaluation. First, the CWCB evaluates the water right according to criteria adopted as part of the instream flow rules.25 The CWCB can acquire only those water rights that preserve or improve the natural environment to a reasonable degree.26 This benefit to the natural environment is examined extensively during the acquisition process. Any acquisition of an instream flow right must be evaluated based on the following factors:27 1) the reach of stream or lake level for which the use of the acquired water is proposed, which may be based on one

preserved or improved by the proposed acquisition; or such other factors the CWCB may identify; 2) the natural flow regime; 3) any potential material injury to existing decreed water rights; 4) the historical consumptive use and historical return flows of the water right proposed for acquisition that may be available for instream flow use; 5) the natural environment that may be preserved or improved by the proposed acquisition, and whether the natural environment water will be from preserved the or improved to a reasonable degree by the available proposed acquisition; 6) the location of other water rights on the subject stream(s); 7) the effect of the proposed acquisition on any relevant interstate compact issue, including whether the acquisition would assist in meeting or result in the delivery of more water than required under compact obligations;

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8) the effect of the proposed acquisition on the maximum use of the waters of the state; 9) whether the water acquired will be available for subsequent use or reuse downstream; 10) the cost to complete the transaction or any other associated costs; and 11) the administrability of the acquired water right when used for instream flow purposes. If the potential acquisition will be a lease, additional factors apply. In this case, the CWCB also must consider whether the water is available to provide flows to meet a decreed instream flow amount in belowaverage years and whether the water could be used alone or in combination with an existing decreed instream flow water right.28 The CWCB then must request and review a biological analysis from the Colorado Division of Wildlife, and review any other biological or scientific evidence presented to the CWCB.29 Water rights in the same stream segment that are available for purchase are given preference over leasehold interests.30 The CWCB also must receive confirmation from Engineer that the The administrable.31 the Division will be then lease

CWCB reviews the historical use of the water right, including the diversion records, beneficial use, location and timing of return flows, and the motivations of the lessor.33 The CWCB also evaluates the legal benefit of the water right by determining whether the new right will be combined or stacked with another instream flow appropriation or acquisition. Stacking could occur when the CWCB holds more than one water right for the same stream reach and exercises these rights independently according to their decrees.34 In other words, it stacks the two rights on top of each other, creating a higher minimum flow.35 Acquisition follows considers process. process water The CWCB it for a public whenever rights

acquiring

instream flow purposes. Public notice of the acquisition is provided through the agenda of each meeting and through mailings to the ISF Subscription Mailing List and the State Engineers Substitute Supply Plan Notification List in the relevant water division.36 This notice must include specific information acquisition.37 The CWCB accepts written and oral public comment prior to its decision.38 These comments may be submitted either through staff or directly to the CWCB at the next relating to the proposed

CWCB

determines the amount of compensation it is willing to pay for the lease.32 Finally, the

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meeting. The CWCB then must solicit a recommendation from the Division of Wildlife, Division of Parks and Outdoor Recreation, U.S. Department of Agriculture, and U.S. Department of the Interior.39 If no request for a hearing is filed, the CWCB takes action on the proposed acquisition after receiving public from comment the and recommendations referral

application with the owner of the water right. The water court must complete several tasks. It must verify the historical consumptive use quantification and the timing and location of return flows to evaluate potential injury to vested water rights.46 The historical consumptive use of the water downstream of the instream flow reach is fully consumable reusable water, and must be stated as such in the contract and change decree.47 Subsequent beneficial use may occur through direct use, sale, lease, loan, or other contractual arrangement by the CWCB.48 If the CWCB has not identified the downstream consumptive use of the water before the decree is finalized, the CWCB may amend the decree or obtain a subsequent decree if required by the Division Engineer.49 This amendment does not require a requantification of the original historical consumptive use calculation.50 For the downstream use to occur, the CWCB must find that the use is consistent with the CWCBs statutory authority, policy, and objectives, and that it will not injure vested water rights.51 Most important, the water court must decree the method by which the historical consumptive use credits from the instream flow use should be quantified and credited

agencies. The CWCB may acquire, acquire with limitations, or reject the proposed acquisition.40 However, any person may request that the CWCB hold a full public hearing on the proposed acquisition by submitting a written statement within twenty days after the first CWCB meeting at which the CWCB considers the proposed acquisition.41 This written request triggers formal hearing procedures.42 Additional parties may intervene in the process on written notice.43 After the hearing is held, the CWCB takes action on the proposed acquisition.44 This action must occur within 120 days of the CWCBs first consideration of the proposed contract at a CWCB meeting.45 Change in water court. If the CWCB approves the acquisition of the lease, it must file a change case in water court to legitimize the instream flow use and provide the lessor with the benefits of HB 1280. If requested, the CWCB files a joint

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before the lease term.52 The water court first quantifies the historical consumptive use of the water right, based on its original decreed uses, to freeze it in time. No reduction in the historical consumptive use of a water right will occur under the decree except to the extent the reduction is based on the actual amount of water available under the lease.53 This is the heart of HB 1280. The CWCB is required to: (1) maintain annual records of the quantities used; (2) install any measuring devices deemed necessary by the Division Engineer to (a) administer the lease and (b) measure the amount of water that flows out of the reach after use by the CWCB; and (3) measure the amount of water flowing out of the reach after use by the CWCB.54 Any contract is conditioned on the Division Engineers confirmation that the proposal is administrable and is capable of meeting all statutory requirements.55 HB 1280 also removed abandonment concerns for leases to the CWCB. It tolls the ten-year presumptive abandonment period if an appropriators nonuse is the result of a contract with the CWCB for instream flow purposes.56 On the other hand, it also precludes attempted revivals of abandoned water rights by prohibiting the CWCB from acquiring interests in water

rights that have appeared on the Division Engineers abandonment list.57

Potential Impacts

HB 1280 continues the modern trend of placing progressively higher values on ecological uses of water.58 It enhances Colorados providing instream an flow program incentive by for alluring

appropriators to lease their water to the CWCB. In this way, the new law further facilitates Colorados limited free market of water transfers by providing a value-based incentive for appropriators to lease water rights result HB to of 1280 the CWCB.59 voluntary, also creates Conservation free-market a narrow programs often work best when they are the transactions.60 exception to the anti-speculation doctrine. Water owners can preserve the value of a water right indefinitely by leasing it to the CWCB. An appropriator can park or store senior water rights with the CWCB indefinitely, until the value of those rights has fully matured. Although the legislature recognized this issue when it introduced the bill by prohibiting speculative leases,61 this language was stricken from the final version. In any event, the CWCB is required to consider the motivations of the lessor during the acquisition process.62 However, if

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the benefits to the natural environment outweigh any speculative motivations of the lessor, the CWCB can accept the lease and the lessor can enjoy the appreciation of the water right during the lease period without fear that the right will atrophy during the lease period. During this lease period, lessors can analyze the market for these water rights, without any risk of a reduction in the value of the water right. For example, a senior appropriator who no longer uses the full extent of its water rights and who anticipates that a nearby development may occur in the mid- or long-term future, could wait until that development actually occurs and then terminate the lease to market the water rights. This provides a valuable tool for transactional practitioners to preserve the value of senior water rights for future generations. Clients must be prepared, however, to enter into a lease of sufficient length to be palatable to the CWCB. Lessors also may consider retaining the authority to terminate the lease in some reasonable manner based on certain market conditions or other factors. Lessors also must be prepared to go through a change in water court, which includes a quantification of the historical consumptive use.

This new law also benefits municipalities that have accrued a portfolio of absolute water rights.63 Municipalities expecting large population increases may be able to lease that accumulated water to the CWCB until such water is needed to serve During the the municipalitys constituency.

lease period, the municipality receives the public goodwill and economic benefits of improved streamflows, while preserving the historical consumptive use of the water right. To date, the CWCB has made only one acquisition under the auspices of HB 1280. Pitkin County placed a large portfolio of water rights in a revocable trust. Pitkin County, the settlor of the trust, is entitled to revoke the trust at certain dates in the future. The CWCB is the beneficiary of the trust. The CWCB recently filed a change application for one of the water rights within the trust.64
Facilitating Leases: Colorado Water Trust

Practitioners discuss

may

wish the

to

consider

working with the Colorado Water Trust to maximizing environmental benefits of their water rights, which may include a long-term lease to the CWCB. The Colorado Water Trust is a nonprofit organization formed to help restore flows for existing habitat while working with users to

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maximize

the

benefits

of

their

water

water right will diminish during the lease term. It also provides private practitioners with a way to preserve the value of a water right on a midor long-term basis. Municipalities likewise have the flexibility to preserve the value of excess water rights until needed for future population growth.

portfolio.65 It encourages voluntary, marketbased transactions to put more senior water into stressed stream segments and often collaborates with the CWCB.

Conclusion
Colorados instream flow program continues to gain strength as legislators and their constituents place a higher value on the environment and recreation. HB 1280 provides a new tool for the CWCB to protect instream flows by acquiring senior water rights on a temporary basis, without fear that the historical consumptive use of the

Colorados continue population to

instream gain of the

flow

program as

will the

momentum state demands for

expands, water

nonconsumptive

continue to increase, and more strain is placed on this precious public resource.

Notes

1. 2008 Colo. Sess. Laws, Ch. 170, House Bill (HB) 08-1280. 2. See, e.g., Colorado River Water Conservation Dist. v. Rocky Mountain Power Co., 406 P.2d 798, 800 (Colo. 1965) (stating: There is no support in the law of this state for the proposition that a minimum flow of water may be appropriated in a natural stream for piscatorial purposes without diversion of any portion of the water appropriated from the natural course of the stream . . . the right to the maintenance of the flow of the stream is a riparian right and is completely inconsistent with the doctrine of prior appropriation.). 3. Water Right Determination and Administration Act of 1969, 1969 Colo. Sess. Laws 1200, Ch. 373, 1, codified at CRS 148-21-3. 4. Id. 5. 1973 Colo. Sess. Laws, Ch. 442, Senate Bill (SB) 73-97. 6. Id. at 2, codified at CRS 37-92-102(3).

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7. Id. 8. Colorado River Water Conservation District v. Colorado Water Conservation Board, 594 P.2d 570, 573 (Colo. 1979). 9. 1981 Colo. Sess. Laws, Ch. 431, SB 81-41, codified at CRS 37-92102(3)(a) to (d). Note that the instream flow law cannot be construed to deprive the people of the state of Colorado of the beneficial use of those waters available by law and interstate compact. CRS 37-92-102(3). 10. See Shupe, The Legal Evolution of Colorados Instream Flow Program, 17 The Colorado Lawyer 861 (May 1988). 11. Id. at 2. 12. 1986 Colo. Sess. Laws, Ch. 235, SB 91, codified at CRS 37-92102(3). 13. See SB 02-156. 14. See Senate Judiciary Committee Hearing, Feb. 13, 2002 in the Supreme Court Chambers (SB 02-156 was discussed from 6:08 to 7:36 p.m.). 15. 2002 Colo. Sess. Laws, Ch. 149, 1, SB 02-156, codified at CRS 37-92-102(3). In other words, since 2002, the Colorado Water Conservation Board (CWCB) has been authorized to appropriate minimum flows to preserve or improve the natural environment to a reasonable degree. 16. See Beatie, Riverbank: Water Trusts in the Western United States, 11 ABA Section of Environment, Energy, and Resources, Water Resources Committee Newsletter (May 2009). 17. See id. (discussing the challenges of the CWCBs acquisitions program and of the Colorado instream flow program in general). In 2008, the Colorado Legislature appropriated funds to the CWCB for acquisitions for the first time in its history. (See 2008 Colo. Sess. Laws, Ch. 338, 28, HB 08-1346 (appropriating $1 million annually to be used for the costs of water acquisitions for existing and new instream flow water rights); 2008

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Colo. Sess. Laws, Ch. 339 3, SB 08-168 (allocating $500,000 from the Species Conservation Trust Fund to preserve or improve the natural environment of threatened and endangered species.). 18. See Santa Fe Trail Ranches Property Owners Assn v. Simpson, 990 P.2d 46, 52 (Colo. 1999). 19. Id. See also Wells, Leasing Water Rights for Instream Flow Protection: The Opportunities and Impediments to Improved Public Interest Involvement in Colorados Instream Flow Protection Regime, 7 U. Den. Water L.Rev. 309, 363 (2004) (discussing some challenges to Colorado lease program for instream flows). 20. See Santa Fe Trail Ranches, supra note 18 at 53 ([A] water right comes into existence only through application of the water to the appropriators beneficial use; that beneficial use then becomes the basis, measure, and limit of the appropriation.). 21. Id. 22. See Shupe, supra note 10. Note also that the CWCB is authorized to receive temporary loans of water for periods of 120 days per year and in three out of ten years (a 3-in-10 loan). These 3-in-10 loans do not require water court approval, but must be approved by the State and Division Engineers. CRS 37-83-105(2). Periods of time during which a water right is used as a 3-in-10 loan are excluded from any future historic consumptive use analysis in water court. Id. at 2(c). 23. This article discusses HB 1280 in the context of leases. However, the bill authorizes the CWCB to acquire an interest in water in any manner, including by grant, purchase, donation, bequest, devise, lease, exchange, or other contractual agreement. CRS 37-92-102. The principles of HB 1280 therefore apply to any arrangement in which the CWCB holds any form of temporary or defeasible interest in the water right, like a lease, trust agreement, or temporary exchange. 24. CRS 37-92-102.

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25. Rules Concerning the Colorado Instream Flow and Natural Lake Level Program, 2 C.C.R. 408-2 (ISF Rules). 26. CRS 37-92-102(3) (The board also may acquire, by grant, purchase, donation, bequest, devise, lease, exchange, or other contractual agreement, from or with any person, including any governmental entity, such water, water rights, or interests in water that are not on the division engineers abandonment list in such amount as the board determines is appropriate for stream flows or for natural surface water levels or volumes for natural lakes to preserve or improve the natural environment to a reasonable degree.). 27. ISF Rule 6e. 28. ISF Rule 6f(1). 29. ISF Rule 6f(2). 30. ISF Rule 6f(3). 31. ISF Rule 6f(4). 32. CRS 37-92-102(3); ISF Rule 6f(5). See also Beatie, supra note 16 (discussion of the difficulties of determining compensation of any acquisition of an instream flow water right, and of the difficulties in facilitating water transfers in general). 33. ISF Rule 6f(6). 34. ISF Rules 6c and 4o. 35. There has been at least one contest to the legality and administrability of stacking. See In the Matter of Proposed Instream Flow Acquisition Division 5: Stapleton Brothers Ditch, Colorado Water Conservation Board (Nov. 17, 2009). There, opponents argued, inter alia, that stacking increases an existing minimum flow, and therefore requires a new junior appropriation. See CRS 37-92-102(4) ([a]ny appropriation made pursuant to subsection (3) of this section shall also be subject to the following principles and limitations: (a) . . . Any increase to an existing

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minimum stream flow or natural lake level appropriation or decree shall be made as a new appropriation). 36. ISF Rules 6m and 11a. 37. ISF Rule 6m(1). 38. ISF Rule 11b. 39. ISF Rule 11c. 40. ISF Rule 6n. 41. ISF Rule 6m(4). 42. ISF Rule 6m(5). 43. ISF Rule 6m(5)(d). 44. ISF Rule 6n. 45. ISF Rules 6m(5)(a) and 6b. 46. ISF Rule 6i. 47. ISF Rules 6h and 6(i)(3) 48. Id. 49. ISF Rule 6i(3)(b). 50. Id. 51. ISF Rule 6h(3). 52. ISF Rule 6i(4). 53. CRS 37-92-103(3) (stating no reduction of the historical consumptive use of the water right will occur during the lease term except to the extent such reduction is based upon the actual amount of water available under said rights). 54. Id.; ISF Rule 6g. 55. ISF Rule 6f(4). 56. CRS 37-92-103(2)(b)(VI). Even without this provision, a lease to the CWCB would be good evidence of the lessors intent not to abandon the water right. 57. CRS 37-92-102(3).

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58. See, e.g., Hobbs, Colorado Water Law: An Historical Overview, 1 U. Denv. Water L.Rev. 1, 21 (1997). 59. Colorados market for transfers of water rights is not a pure free market, due to the cumbersome procedures to change water rights and the locational limitations placed on a natural resource. See Sinden, The Tragedy of the Commons and the Myth of a Private Property Solution, 78 U Colo. L.Rev. 533, 576, n.128 (2007). In any event, Colorados common law has recognized strong property rights to water since before statehood, which rights could be transferred and sold. HB 1280 preserves the value of a water right and further facilitates free market transfers of water rights. 60. See, e.g., Beatie, supra note 16 at 4. 61. HB 1280, 1 (introduced version), available at www.leg.state.co.us/clics/clics2008a/csl.nsf/fsbillcont3/27AA1B3007A47 BD18725737C007B2359?open&file=1280_01.pdf. 62. ISF Rule 6f(6). 63. Note, however, that conditional rights cannot be acquired by the CWCB for instream flow purposes. CRS 37-92-102(c)(3.5). 64. See Application for Change of Water Right, Case No. 10CW184, District Court, Water Division 5 (June 30, 2010). 65 See Beatie, supra note 16.

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