November 13, 2019

Water Banking: A Distribution Solution

Cedar Q. Cosner

By the year 2060, 420 million people are projected to live in the United States, an increase of approximately 100 million from today. Stephanie Ewert, U.S. Population Trends: 2000 to 2060, U.S. Census, NCSL Fiscal Analysts Seminar (Oct. 15, 2015), http://www.ncsl.org/Portals/1/Documents/nalfo/USDemographics.pdf. As the population increases, the demand for water will increase accordingly. Water banking presents one option for certain states, particularly those in the arid West, to prevent the waste of water by removing the risk of forfeiture for unused quantities, thereby serving to maximize the use of limited water resources. By creating consolidated markets of unused water that third parties can lease for use at a fair market price, public water banking programs help distribute water that otherwise would go unused. This article discusses the various governance structures that have been used or attempted to implement water banking programs.

Water banking is a relatively untested addition to the traditional prior appropriation water doctrine, which was adopted by settlers moving into the western states. In summary, the prior appropriation doctrine gives an appropriator who first diverts and applies a water resource to a beneficial use—such as industry, irrigation, residential, or municipal use—the right to use the quantity of water so applied to the exclusion of any later-established uses. If the appropriator continues to use that water beneficially, the right will typically exist in perpetuity, and the appropriator will have the right to stop subsequent water users from diminishing the appropriator’s water right. Conversely, if the appropriator fails to use all or part of his or her water right in a beneficial way for a period of years, most jurisdictions have the authority to forfeit the right or unused portion. See, e.g. Utah Code Ann. § 73-1-4 (seven years).

Under the prior appropriation system, water rights typically began tied to the land for which they were appropriated, and a person could not appropriate more water than that person could beneficially use on the land. As land uses changed, situations arose in which the appropriated right exceeded the land on which it could be beneficially used. For example, due to marginal crop yields or values, a water right holder may find that it is not economically viable to beneficially use an entire water right. One option under those circumstances is to sell the right or unused potion. However, that does not address situations in which the right holder anticipates resuming full beneficial use of the right in the future. In that situation, a water right holder may have, and intend to keep, the right to beneficially use more water from a right than he currently has land to viably use it on.

This can create a problem. If a water right goes unused too long, it is forfeited. But that takes years. For an extreme example, a surplus water right holder in Utah need only find a way to beneficially use his surplus water once every seven years to preserve the right. See id. More typically, a farmer may let irrigable acreage go dry on crop rotation for a year, or a developer may hold water rights in reserve while a project is built out. Municipalities or other public water suppliers may also hold idle water reserves in anticipation of future development. In each of these cases, an idle water right is a wasted opportunity.

Water banking is an attempt to resolve the problem of wasted or unused water. Fundamentally, water banks are institutional mechanisms through which water right holders can safely deposit unneeded rights into a regulated account, and people who need water can lease it from the account at a fair market-rate on a temporary basis. See Water Transfers in the West: Projects, Trends, and Leading Practices in Voluntary Water Trading, Western Governors’ Ass’n (Dec. 2012), at 38, www.westernstateswater.org/wp-content/uploads/2012/12/Water_Transfers_in_the_West_2012.pdf. By creating a centralized market for the leasing of water rights, and better ensuring that water rights remain productive, lessors, lessees, and the water-using public benefit.

Private leasing is not new to water rights. Generally, private parties are free to contract for water use, and if the change of use does not impair other water rights, the transaction goes smoothly. However, even with contractual provisions to the contrary, a private lease agreement cannot ensure that water rights leased actually are used or otherwise protected from forfeiture. Water banking takes leasing a step further by protecting a lessor’s water rights from forfeiture. Under a typical water banking system, water deposited in the water bank is protected from forfeiture statutes that otherwise would apply, even if the right in the bank sits unleased and unused. See, e.g., Idaho Code Ann. § 42-222(2) (“failure for the term of five (5) years to apply [a water right] to the beneficial use for which it was appropriated” results in forfeiture of the right); Id. § 42-223(5) (“A water right shall not be lost or forfeited . . . while the water right is placed in the water supply bank or is retained in or rented from the water supply bank . . . .”).

Lessors who participate in water banking can lease their water without risk of loss. Rather than letting a water right sit idle during a crop rotation, it may make more sense for the holder of a surplus water right to bank the right temporarily and be compensated for its use. This complements the primary focus of water banking—the creation of a single market that can effectively distribute unused water reserves. By getting water right holders to deposit their unused water rights into a bank, a single accessible market is created that potential lessees can use to satisfy their water needs without hunting for available water rights in the private market.

To date, California, Colorado, Idaho, Montana, Oregon, Texas, and Washington have created some form of public water bank system designed to facilitate water right transactions between private parties. Nazaret M. Montilla-Lopez et al., Water Banks: What Have We Learnt from the International Experience, Univ. Cordoba Dep’t of Agri. Econ., Water (2016), at 5–8. Utah and Wyoming may be the next states to join the public water banking field. (While Arizona, Nevada, and New Mexico are also sometimes discussed in the water banking context, the existing programs in those states do not enable centralized markets. Instead, they are designed for the storage of water to serve long-term future needs, or in the case of New Mexico, to augment stream flows. They are not discussed here.)

Although water banking systems share common features, such as protection from water right forfeiture, there is no magic formula behind the creation of a successful water bank. In fact, there are at least three distinct operational schemes that water banking systems have adopted.

Some water banking systems provide for centralized public governance. The longest-running water banking system, in Idaho, has been singularly controlled by the state water resource board since 1979. The bank is centralized and holds all banked water rights in the state. Idaho Code Ann. § 42-1761. The board has authority to “contract with lessors and lessees to act as an intermediary in facilitating the rental of water,” and all rentals from the bank “must be approved by the director of the department of water resources.” Id. § 1762–63. Contracting lessees are entitled to take water from one of several reservoirs managed by state districts. In 2018, Idaho recorded 300 water lease applications.

To a lesser degree, California utilized this form of governance when it instituted its Drought Water Bank program, a conditional water banking system that is implemented in periods of drought. The state entered a series of purchase agreements to buy excess water rights from private parties and then redistributed it from a centralized market. It was first utilized from 1991 to 1994 and was generally considered a success, redistributing approximately one million acre-feet of water in that period. It was utilized again in 2009 with diminished effect, redistributing only 82,000 of the state’s 600,000 acre-foot goal. One possible reason for the 2009 bank’s limited success was the addition of regulations defining who could sell water to the state, which served to increase the transaction cost between seller and buyer. See Robin Kundis Craig, Drought and Public Necessity: Can a Common-Law “Stick” Increase Flexibility in Western Water Law?, Utah Law Faculty Scholarship 98 (Mar. 2018), at 10–11.

Texas also attempted direct public governance in its ill-fated Texas Water Bank instituted in 1993. While still technically active, the project is largely considered a failure for lack of participation, completing only one transaction in its first ten years of existence. Currently, seven lessors are involved in the program, with the last deposit in 2009. The state’s decision to allow other private leasing markets to endure and to compete with the public system greatly inhibited its ability to gain traction with local water users. See Peggy Clifford et al., Analysis of Water Banks in the Western States, Wash. Dep’t of Ecology, Pub. No. 04-11-011 (July 2004), at 112.

The Washington water banking program provides an example of a second type of governance—centralized public-private partnership. While Washington’s water board will act as a bank to individual water users, it also permits private parties to conditionally assume the role of water bank. Washington’s water board has broad statutory authority to administer “trust water rights acquired by the state.” Rev. Code Wash. Ann. § 90.42.040(1). Rather than directly distributing water rights, the state water board contracts with private bankers or water users, who place water rights in the state trust as part of the agreement. Those water rights are considered mitigation for new water uses that are subsequently made through the bank or by the water user. See Rev. Code Wash. Ann. § 90.42.100. Because Washington does not directly manage its water banks, it is difficult to determine how many individual water lease arrangements have been made. However, Washington has authorized 25 water banks across the state.

Finally, some water banking systems provide for direct local public governance. States in this third category have set up region-specific banks that are locally managed by water districts or conservancies, subject to broad rules at the state level. In Oregon, the Deschutes River Conservancy administers the Deschutes Water Alliance Water Bank, a water bank specifically focused on the central part of Oregon. Deschutes Water Alliance, Water Bank: Balancing Water Demand in the Deschutes Basin, at 3 (last visited Aug. 8, 2019), https://www.deschutesriver.org/DWA-Water-Bank.pdf. In 2002, Colorado launched an unsuccessful pilot program governed by a local conservancy that had no recorded transactions—likely due to skepticism from the local water community as to whether the system would effectively protect deposited rights or facilitate transactions. Utah appears poised to adopt a local public governance system, citing a need to account for the “unique circumstances and needs” of various water regions in the state. Summary of Water Banking Subgroup Findings (May 29, 2018), at 2–3, www.waterrights.utah.gov/meetinfo/task_force/wbanking/20180529_subgroup_findings_summary_addendums.pdf. However, no specific legislation has been formally proposed in Utah yet.

As water needs grow, it will become increasingly important that states find ways to reintroduce water that is not being used back into the stream of commerce. Water banking has emerged as a viable candidate to accomplish just that. Moreover, water banking has been shown to work under multiple operational schemes. But any plan for implementation should take into account the potential pitfalls to success, including overly cumbersome transactions between lessor and lessee, skepticism from water right holders, and competition from private water markets where applicable. Although multiple operational schemes may be workable for a state’s specific needs, all states designing a water banking program should endeavor to implement lean water banking mechanisms with an eye toward making water leasing as easy as possible without adversely impacting water right holders.

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Cedar Q. Cosner

Mr. Cosner is a water resources attorney in the Environmental and Natural Resources practice group at Parsons Behle & Latimer in Salt Lake City, Utah. He may be reached at ccosner@parsonsbehle.com.