From The Colorado Sun (Thy Vo and Michael Booth):
Legislators want to tackle water speculation after two companies buying up water rights in Grand Valley and the San Luis Valley sparked fears
Want to understand water speculation in Colorado?
Let’s say you’re in line at a pizza shop.
Hear us out.
There’s a big sign at the pizza counter saying, “Limited quantities due to climate change. Buy only what you can eat.”
But the guy in front of you buys five pizzas for $20 each. He starts reselling them by the slice for $5 a piece. The store owner says, “You can’t do that here.”
The pizza glutton walks away, saying, “Fine. I’ll put them in the freezer and I’ll eat it all later.”
Do you believe him?
And if you don’t believe him, what are you going to do about it?
That kind of speculation on water purely for profit is supposed to be illegal already in Colorado. But under current law, there’s no way of telling what’s in the water buyer’s heart. The buyer can say they’ll keep using the water for farming or for city drinking water or for a gold medal fly fishing stream.
The 2022 legislative session is shaping up to be a big battleground for this key question about the future of water rights in Colorado. Climate change is cutting into the amount of water available in Colorado’s rivers. Front Range and resort communities continue their rapid, thirsty growth. And state officials may need to lock down reserve supplies across the region in case a seven-state compact demands we deliver big water downstream in the western lifeline that is the Colorado River. Who gets to broker the inevitable water sales is a moral, legal and economic question for our time…
Water users and lawmakers say they’re especially worried about a new, potential threat: investors and out-of-state private equity buying up water rights to wait for an opportune time to sell, potentially taking away water from other users like farmers and ranchers and driving up values.
“Every water right on the Western Slope, particularly those closer to the border, will have an increased value,” said state Sen. Kerry Donovan, a Vail Democrat. “And if those are being held by those in New York or Dallas investment firms, that’s a very different scenario.”
Donovan, state Sen. Don Coram, a Montrose Republican, and Democratic state Rep. Karen McCormick, a Longmont Democrat, have drafted legislation that would attempt to prohibit speculation for pure financial gain. But almost nobody, including the sponsors, is wholeheartedly behind the bill as written…
Still, many have concerns that, even if proponents can find a way to effectively ban profiteering, the proposal could jeopardize ordinary transactions between farmers and other water rights holders that are currently legal.
“They may be casting the net to bring in tuna, but a law like this could bring in a lot of dolphins as well,” said Joe Bernal, a fourth-generation farmer in Grand Valley and president of the board for the Grand Valley Water Users Association. “We have an anti-speculation [doctrine] that is sufficient in Colorado.”
Pizza, fish nets … complex water rights battles tend to spawn multiple metaphors in search of simple explanations. Cyran offers another, when critiquing whether a new anti-speculation bill would give too much power and responsibility to the state water engineer in deciding what water buyers’ true designs might be.
New anti-speculation duties could transform the water engineer’s office from a traffic cop into a prosecutor, Cyran said.
“It puts him in a tough place of determining intent,” Cyran said.
A looming threat, or the market at work?
Pressure is building after two decades of Western Slope drought to clarify Colorado water law for inevitable battles. The Colorado River, serving 40 million people in seven Western states and Mexico, is delivering 20% less water downstream than just two decades ago. River volume could drop that much again in the next two decades.
Through the Colorado River Compact, Upper Basin states — Colorado, New Mexico, Utah and Wyoming — must deliver 7.5 million acre-feet of water each year to the more populous Lower Basin states — Arizona, California and Nevada. Most of that comes from melting Colorado snowpack. Climate change and drought have already dropped water levels in Lake Mead to trigger points that mean 500,000 acre-foot cutbacks for Arizona’s water use in 2022.
If Colorado’s compact water deliveries to Lower Basin states fall below the average over a decade, state officials would need to cut use by farmers, cities and others to allow more to flow down the Colorado River and across the Utah border.
Most state leaders don’t want to wait until there’s a “compact call” that would force emergency cuts across the board. They have experimented with demand management, in effect renting farmers’ water for three years out of 10, to find water without drying up agriculture permanently. But large-scale purchases of hundreds of thousands of acre-feet would cost hundreds of millions of dollars. Front Range cities shopping for future water supplies are being quoted up to $50,000 an acre-foot, according to water developers.
Meanwhile, thirsty Front Range cities keep growing, with those like Parker and Castle Rock looking to replace depleted aquifer water with renewable river water.
Expanding demand and shrinking supply is a recipe for worry.
Farmers and ranchers worry investors will buy up their way of life — but they also worry the state could impede their ability to make money by selling their valuable water rights. Cities worry that prices are soaring, and that brokers will lock up dwindling supplies. State and nonprofit officials who support demand management worry that by the time they have to rent water in bulk, they’ll have to negotiate with hedge funds.
Two private water-buying efforts — whose owners are adamant they are not speculators — prompted much of the recent talk about toughening laws against water profiteering.
In 2020, as the Colorado River Water Conservation District on the Western Slope was winning a mill levy election to fund local water projects, its leaders and supporters pointed fingers at a private equity firm called Water Asset Management. The New York-based firm, with the help of local advisors, had become the biggest single landowner in the Grand Valley Water Users Association, buying up farms and the accompanying water rights…
James Eklund, former director of the Colorado Water Conservation Board and now an adviser to WAM, says the investors have owned much of the Grand Valley land for five years, and are not flipping the property or water rights to others. The buyers seek profits in improving farm management and upgrading water systems for efficiency, Eklund said.
Bernal also served on a state-appointed working group that included water managers, lawyers and a former state Supreme Court justice and studied the speculation issue for nearly a year before deciding over the summer not to recommend any of the concepts they considered. With a lack of consensus on how to strengthen speculation laws — and a lack of agreement on how exactly to define the problem — Bernal thinks it’s a mistake for lawmakers to pursue legislation to tackle a problem that he says has yet to arrive…
One provision of the draft speculation bill is aimed squarely at recent Grand Valley history: It directs each ditch company to set a percentage cap on how much of their collective water rights any one member can control.
Eklund, whose own family has deep farming roots on the Western Slope, finds the bill’s vague language and layers of restrictions to be anti-capitalist, whether the drafters meant it to be or not…
Pumping SLV water to the Front Range stirs more fears
The other project most frequently invoked in warnings is Renewable Water Resources, a private effort by former Gov. Bill Owens and partners to gather San Luis Valley water rights and pipe the water to municipal buyers on the Front Range. The investors say they are spending $68 million just for the water rights, and they will create a $50 million community fund for the valley.
RWR has been talking with Douglas County about becoming the primary buyer of the water, and is now pitching the county to use millions of federal stimulus money to seal the deal. While they are buying up valley water to sell to the Front Range at a profit, project spokesman Sean Duffy said, RWR is most definitely not speculating.
With Front Range communities like Douglas County lining up to buy the water to serve Colorado residents, Duffy said, “this is a very specific project for a very specific need.”
Yet the proposal, which could spend years in water court before any construction begins on the pipeline needed to move the water, has spurred near-universal public opposition in the San Luis Valley, with dozens of towns, water districts and civic leaders blasting any loss of water.
State Sen. Cleave Simpson, an Alamosa Republican who also works as the general manager for the Rio Grande Water Conservation District, said various investors and entrepreneurs have proposed exporting water from the San Luis Valley for decades…
Still, any new legislation to make speculation even less likely than under existing law must protect the interests of farmers and ranchers whose rights to water are the most consistently valuable thing they control, he added…
It’s a delicate conversation for Bernal, who sits on the board of the Grand Valley Water Users Association and like others is now also renting land from Water Asset Management. The association, which hasn’t taken a position on the draft legislation, largely supplies irrigation water to commercial farming operations.
He and other local farmers are always worried about new threats to local water or efforts to develop land currently used for agricultural production, Bernal said…
Would the bill actually block speculation?
Colorado already has [an] anti-speculation [doctrine] that require people to put their water rights to “beneficial use,” such as irrigating a farm, providing tap water for a city, making ski area snow, or providing stream flow for recreation.
Water courts will require those filing for a new use of a water right to show they have a customer for the new beneficial use. Colorado statutes and case law require that, too. But the answer to the question of whether legal brokering also appears to be a “speculative” flip is not clear. How long does a water buyer have to use the right before selling it to another party? What’s the consequence if they later change the use of the water that they expressed when buying the water right?
The draft bill backed by Donovan and Coram aims to target situations where a water right is purchased specifically with the intent to make a profit in a later sale or transaction.
Currently, if a person or company wants to buy a water right, they need to show they “can and will” put the right to beneficial use, said Kevin Rein, state engineer for the Colorado Division of Water Resources.
But it’s going to be “very difficult” to prove this more nebulous type of financial speculation, Rein said — that at the time of the sale, the buyer intended to use the water right primarily to make a buck. Current water law doesn’t provide a structure to consider those questions, let alone what the answers should be, he said.
The draft bill doesn’t say how investment speculation would be identified. It does require the buyer, if the sale is challenged, to offer up evidence that they aren’t engaging in financial speculation. The legislation would also task Rein’s office, which is responsible for administering water law, with the authority to investigate suspect sales. The agency already looks at transactions to determine whether they violate current anti-speculation laws, but that’s a simpler analysis that’s more administrative than legal.
How the state water engineer would implement the bill could also be resolved through a rulemaking process rather than decided by lawmakers.
Simpson, the senator from Alamosa, also questions whether it’s appropriate for Rein’s office to be given that authority…
Either way, trying to ban investment speculation would be new territory for Colorado water law, said Rein, who also served on the working group that studied the issue over the summer. And he believes Colorado water courts have yet to examine the type of financial speculation the legislation wants to target…
There’s also the question of how the state could actually enforce the law against speculators with deep pockets to fund lawyers and pay penalties, which the draft bill caps at $10,000. Under the proposal, if someone is fined for a speculative transaction, the state engineer could also impose a waiting period of up to two years on the sale or transfer of shares to the buyer.
Supporters of the draft, including Donovan, acknowledge the details of the bill will be complex, and contested.
Donovan said the proposal will need a lot of work to balance personal property rights and preventing profiteering off a dwindling public resource.