2014 Legislative Preview: Shareholders' Rights Legislation

The following article was written by Craig Smith, one of my partners at Smith Hartvigsen, PLLC, for the Water & The Law newsletter that our firm publishes on a quarterly basis. If you would like to receive an email version of the newsletter, please click here to join our mailing list.

The very controversial water issue, the rights of shareholders of nonprofit water companies, will be back before the Utah Legislature in 2014. The 2013 legislation sparked a lively debate during the session which ended in a deadlock with the House approving the legislation and Senate not acting as the session ended. In legislative parlance, the 2013 shareholder rights legislation "died on the board." Rep. Kay McIff (R-Richfield) has now prepared a new version of his 2013 shareholder rights legislation and plans or introducing it during the 2014 legislation session.

Historically, nonprofit water companies came into being when individual farmers determined that they needed to band together to construct the water diversion and distribution facilities necessary to irrigate their farms. For decades, this commonality of interest (e.g., common facilities to deliver water for a common use) bound these companies together. After construction, these facilities needed to be operated and maintained. The water rights themselves were put in the name of the company and individual ownership of and right to use the water was represented by shares of stock in the nonprofit mutual water company.

As irrigated fields began to make way for subdivisions, this commonality of interest began to wane. Shareholders who sold their farms to developers sold their water shares as well. Cities began to either require dedication of or purchased shares and then filed change applications to move irrigation water to municipal sources and uses. In 1993, this practice led to the Utah Supreme Court ruling in East Jordan Irrigation Company v Morgan, commonly known as "the East Jordan Case."

The Utah Supreme Court ruled that shareholders of mutual irrigation companies could no longer file change applications based on their shares. The Supreme Court reversed the long standing practice of the State Engineer and held that only the company, as the holder of the water right, could file an application to change the point of diversion, place of use, nature of use or season of use of a water right.

Although the East Jordan Case stated that companies needed to reasonably consider requests from shareholders to file a change application, "reasonable" wasn't defined and some companies began to either refuse to consider change application requests or to impose conditions such as requiring approval of a super majority of all other shareholders.   In 2002, after a two year effort, then Senate President Leonard Blackham (R-Sanpete) obtained passage of what is now found in Utah Code section 73-3-3.5, the first legislation to define shareholder rights in the context of a shareholder initiated change application. While many argue that Section 73-3-3.5 works well, others disagree.

           

Rep. McIff's current legislation seeks to provide additional rights and protections for shareholders. According to Rep. McIff, who is a lawyer and former judge, his legislation has ten objectives:

1.  Retain the historical qualification that "a person entitled to use of water" may file a change application.

2.  Require a shareholder change application be submitted to the water company for its response before filing with the state engineer.

3.  Require a water company response within 60 days so that all the issues are on the table as early as possible.

4.  Eliminate stonewalling by the water company and the necessity of front end litigation by a shareholder just to obtain the right to file the change application.

5.  Maximize the opportunity for dispute resolution, including relying on mediation to resolve or refine the issues before administrative review of litigation.

6.  Allow either the water company or the shareholder to seek advance court resolution of legal issues (e.g., corporate issues) not within the purview of the state engineer.

7.  Foster the state engineer's gate-keeping role and facilitate getting the water issues before the state engineer as soon as practical.

8.  Provide more practical compensation options for water companies when water is removed from a delivery system, and equalize the remedies if either side is unreasonable.

9.  Allow a shareholder to elect whether or not to participate in the sale of water or an underlying water right proposed by the water company.

10.  Continue to allow denovo judicial review of the state engineer's final decision.

Whether or not Rep McIff's legislation or some derivation thereof passes in 2014 is anyone's guess, but with the continued conversion of farms to subdivisions, this issue will not soon fade away.

To read the full text of the proposed legislation (House Bill 49), click here.
Update: First Substitute House Bill 49 has been introduced. To see the differences between the original bill and the first substitute bill, click here.

Public Meeting Concerning a Proposal to Modify the Groundwater Management Plans for Cedar Valley and Northern Utah Valley

The Utah Division of Water Rights has set a public meeting to discuss a proposal to modify the groundwater management plans for Cedar Valley and northern Utah County. The following information is from the public meeting notice:

What: Public Meeting
Who: Cedar Valley and Northern Utah Valley water users
When: January 15, 2014, 4:00 p.m.
Where: Lehi City Council Chambers, 153 North 100 East, Lehi, UT 84043
Purpose: The purpose of the meeting is to present a proposal to modify the groundwater management plans for Cedar Valley and Northern Utah Valley. Personnel from the Division of Water Rights will be available to take all questions and comments provided by the general public and interested parties.

This meeting is a follow-up to the meeting held in May 2013.  If you have water rights in the Cedar Valley area (Area 54) or the Northern Utah Valley / Provo River area (Area 55), you may want to attend the public meeting, as it appears there will be forthcoming changes to the groundwater policies in the area.

For more information about the public meeting, click here.

For current water right policies in the Cedar Valley area, click here.  

For current water right policies in the Northern Utah Valley / Provo River area, click here.

Delta Canal Company v. Frank Vincent Family Ranch -- Amended Opinion

Today the Utah Supreme Court issued an amended opinion in the case of Delta Canal Co. v. Frank Vincent Family Ranch LC. 

The amended opinion only modified paragraph 41 of the original opinion.  As discussed in my blog post about the original opinion, paragraph 41 raised issues and concerns to many in the water community, and appeared to be in conflict with long-standing policies of the Utah Division of Water Rights.  The paragraph below shows the differences between paragraph 41 in the original opinion and paragraph 41 in the amended opinion.  The stricken language is language that the Court removed, and the underlined language is language that the Court added.

"Finally, the number of acres irrigated is not determinative in a forfeiture analysis, though it may be relevant insofar as it indicates the volume of water used or  whether water usage is beneficial.  Farmers may reduce the total acres irrigated to grow a more water-intensive crop, or vice-versa, so long as they beneficially use their full entitlement.  The number of acres irrigated need not match the number listed on a proposed determination or a final decree from a general adjudication.  The central question in any forfeiture proceeding is whether the appropriator used all of its water allowance in a reasonable manner and for a beneficial purpose."

To read the entire amended opinion, click here.

Water Calculation App for Android

A few months ago, Smith Hartvigsen announced the launch of its iPhone app "Water Chart."  Smith Hartvigsen is now pleased to announce that the Water Chart app is also available for Android phones.  The app allows the user to make water measurement conversions, such as:

• Convert gallons per minute (gpm) to cubic feet per second (cfs)
• Convert millions of gallons to acre-feet
• Convert cubic feet per second (cfs) to acre-feet per year 

 The app also converts measurements associated with land, such as:

• Convert feet to miles
• Convert rods to feet
• Convert links to feet
• Convert kilometers to miles
• Convert square feet to acres

The app also contains other useful information about Utah water rights, the public land survey system (section, township, and range), and more.

For more information and to download the Android app, click here.

Delta Canal Company v. Frank Vincent Family Ranch

Last week, the Utah Supreme Court issued its opinion in Delta Canal Co. v. Frank Vincent Family Ranch LC.  In this case, Delta Canal Company, Melville Irrigation Company, Abraham Irrigation Company, Deseret Irrigation Company, and Central Utah Water Co. ("DMADC") brought a lawsuit seeking forfeiture of a portion of a water right owned by Frank Vincent Family Ranch ("Vincent").  DMADC alleged that Vincent and/or Vincent's predecessor had forfeited about 20% of the water right due to nonuse and/or abandonment.

The district court ruled in favor of Vincent, holding that DMADC was precluded from claiming partial abandonment or partial forfeiture.  The district court's ruling was based on its determination that because Vincent had not received his full flow of water each year, Vincent was protected by a statutory exception to forfeiture.  Part of the district court's ruling was that Utah law did not recognize partial forfeiture of a water right prior to 2002.  DMADC appealed the decision to the Utah Supreme Court.

The Utah Supreme Court began its analysis by examining whether partial forfeiture of a water right existed prior to 2002, which was the year when the Utah legislature amended Utah Code 73-1-4 to explicitly provide for partial forfeiture.  The Court noted that the doctrine of partial forfeiture had been enunciated in several prior Utah Supreme Court opinions, starting in 1897.  The Court next concluded that partial forfeiture is inherent in Utah's beneficial use regime, and that the only way to reconcile the forfeiture statue (73-1-4) with the beneficial use statute (73-1-3) is to conclude that partial forfeiture has always existed in Utah law.  The Court also noted that many other courts in the western United States have also concluded that partial forfeiture is inherent in the concept of beneficial use.

The Utah Supreme Court next tackled the issue of forfeiture versus abandonment of a water right.  The Court reiterated its statements from prior cases that abandonment and forfeiture are distinct legal concepts.  Forfeiture is governed by Utah Code 73-1-4.  Abandonment, on the other hand, is a common law principle that requires intent by the water right owner to give up the water right (something not required by the forfeiture statute) and does not have a time requirement (like the seven-year period of nonuse required by the forfeiture statute).

Finally, the Utah Supreme Court addressed some additional issues related to forfeiture.  The Court instructed that a forfeiture analysis should focus on volume (i.e., acre-feet) of water, and not on acres irrigated or on flow (i.e., cubic feet per second or cfs) limitations of a water right.  Perhaps the most interesting paragraph of the opinion is paragraph 41, which states:

"Finally, the number of acres irrigated is not determinative in a forfeiture analysis, though it may be relevant insofar as it indicates whether water usage is beneficial.  Farmers may reduce the total acres irrigated to grow a more water-intensive crop, or vice-versa, so long as they beneficially use their full entitlement.  The number of acres irrigated need not match the number listed on a proposed determination or a final decree from a general adjudication.  The central question in any forfeiture proceeding is whether the appropriator used all of its water allowance in a reasonable manner and for a beneficial purpose."

This paragraph is interesting because it conflicts with the current legal interpretations and policies of the Utah Division of Water Rights.  Accordingly, it will be interesting to see if the Division of Water Rights (who filed an amicus brief in this case), or perhaps even DMADC, will request the Utah Supreme Court to reconsider its opinion.

To read the full opinion, click here.

[UPDATE: The Utah Supreme Court issued an amended opinion to modify paragraph 41.  Click here to read more.]

Town Hall Meetings Regarding Utah Water

Governor Herbert has set up a committee to seek public input on water policies and strategies for the State of Utah.  The committee will travel across the state and hold "town hall meetings" to hear comments and suggestions on planning for future water needs.  The scheduled meetings are as follows:

July 9    Richfield     Sevier County Fairgrounds, Exhibit Hall
July 11   Layton       Layton City Council Chambers
July 16   Price          Price City Hall, Room 207
July 18   Provo         Provo High School, Auditorium
July 25   St. George  Dixie State University, Dunford Auditorium
Aug 6     Vernal          Vernal City Council Chambers
Aug 13   Salt Lake     Department of Natural Resources, Auditorium
Aug 15   Logan          Mount Logan Middle School

All meetings will be held from 7:00 to 9:00 pm.

For more information on the meetings, or to submit a comment without having to attend a meeting, click here.

Tarrant Regional Water District v. Hermann

It is a rare occurrence that the United State Supreme Court hears a case involving water rights.  But when the Court does hear a water case, it is generally a large case involving a dispute between two or more states regarding a shared water source.  Such is the case in Tarrant Regional Water District v. Herrman, which pits the State of Oklahoma against the State of Texas.

The case focuses on the Red River Compact, which was signed in 1978 by Arkansas, Louisiana, Oklahoma, and Texas following more than 20 years of negotiation.  The purpose of the Compact was to equitably apportion the water of the Red River and its tributaries between the states.  The area covered by the Compact was divided into five subdivisions (called "Reaches"), which were further divided into "Subbasins."  This case centered on Subbasin 5 of Reach II. 

Due to the large population growth in north Texas in recent years, public water suppliers in north Texas began searching for new sources of water to meet the growing demand.  Tarrant Regional Water District and other water districts in north Texas tried to purchase water from Oklahoma, but were unsuccessful. Tarrant then filed a permit with the Oklahoma Water Resources Board to take 310,000 acre-feet of water from the Kiamichi River, which is a tributary to the Red River located in Oklahoma. 

Because Tarrant knew that the permit would be denied based on Oklahoma laws prohibiting out-of-state applicants from diverting water in Oklahoma, Tarrant filed a lawsuit to enjoin enforcement of these laws.  Tarrant claimed that the Oklahoma laws were pre-empted by the Compact and violated the federal commerce clause.  The district court ruled in favor of Oklahoma, and that decision was upheld by the Tenth Circuit Court of Appeals.  The case was then sent to the United States Supreme Court.

The section of the Compact at issue gave the states "equal rights to the use of runoff water originating in subbasin 5 [of Reach II] and undesignated water following into subbasin 5," but was silent regarding state boundary limitations. Tarrant asserted that the Compact therefore allowed them to divert water from Subbasin 5 of Reach II, even if the diversion occurred within Oklahoma.  Oklahoma, on the other hand, argued that because the Compact did not explicitly allow diversions by one state in another state, Texas was prohibited from diverting water in Oklahoma. 

Ultimately, the Court sided with Oklahoma, and held that the Compact did not create any cross-border rights and that the water located within Oklahoma's portion of Subbasin 5 remained under the control of Oklahoma and its laws.  The Court also concluded--in very brief and summary analysis--that Oklahoma's laws did not violate the federal commerce clause.

Public Meeting Concerning Groundwater Management Plans for Cedar Valley and Northern Utah Valley

The Utah Division of Water Rights has set a public meeting to discuss a proposal to modify the groundwater management plans for Cedar Valley and northern Utah County. The following information is from the public meeting notice:

What: Public Meeting
Who: Cedar Valley and Northern Utah Valley water users
When: July 9, 2013, 4:00 p.m.
Where: Highland City Council Chambers, 5400 West Civic Center Drive, Highland, UT 84003
Purpose: The purpose of the meeting is to present a proposal to modify the groundwater management plans for Cedar Valley and Northern Utah Valley. Personnel from the Division of Water Rights will be available to take all questions and comments provided by the general public and interested parties.

If you have water rights in the Cedar Valley area (Area 54) or the Northern Utah Valley / Provo River area (Area 55), you may want to attend the public meeting, as it appears there will be forthcoming changes to the groundwater policies in the area.

For more information about the meeting, click here.

For current water right policies in the Cedar Valley area, click here.  

For current water right policies in the Northern Utah Valley / Provo River area, click here.

2012 Utah Groundwater Report

Each year, the United States Geological Survey (USGS) publishes a report on groundwater conditions in Utah. The report is prepared and published in cooperation with the Utah Division of Water Resources, the Utah Division of Water Rights, and the Utah Division of Water Quality. The report is a valuable resource containing information on well construction, groundwater withdrawal, groundwater level changes, groundwater quality, and much more
The 2012 report is available online and can be accessed by clicking here.

Segregation of Water Rights

In Utah, you are permitted to divide your water right into smaller portions through a process called segregation.  Think of segregating water rights like subdividing land--taking one large parcel (water right) and splitting it into two or more smaller parcels (water rights). 

Generally, segregation occurs when a person sells a portion of a water right to another person.  For example, assume A owns a water right for 10 acre-feet.  A sells 5 acre-feet of the water right to B.  Generally, B will then segregate his 5 acre-feet to a new water right number, thereby separating his 5 acre-feet from A's 5 acre-feet.  B can then file a change application or take other action on his water right without needing the permission or signature of A.

To segregate a water right, you need to file a "Request to Segregate a Water Right" form with the Utah Division of Water Rights, along with a $50.00 fee.  You can access the segregation form online by clicking here.