Water Rights and Takings P. Fritz Holleman, Esg.

“Water Rights and Takings: Inherent Limits on the Property Right and Current Developments in the Law” presented by P. Fritz Holleman, Esq. Porzak, Browning & Bushong Boulder, CO

Defining the property interest — “do plaintiffs possess a property interest and, ifso, what is the proper scope ofthat interest?” Tiage v. (inited States, 42 Fed. Cl. 249, 250 (1998).

I. DIFFERENT SYSTEMS OF SURFACE WATER ALLOCATION.

A. Prior Appropriation.

Where: Western United States. Nine “pure” prior appropriation states in the Mountain West and Alaska.

Basic Rule: Premise of this system of water allocation is that in a time of shortage “first in time is first in right,” i.e. when there is not enough water for everyone, “senior water rights” (those initiated earlier in time) will get their full allotment before “junior water rights” (established later in

time) can take any water. Rights protected via a “call” — “A call is placed on a river when a senior appropriator forces upstream juniors to let sufficient water flow to meet the requirements of the senior priority.” 1151 Properties East, inc. v. Simpson, 938 P.2d 168, 171 n. 2 (Cob. 1997). Geographic relationship to water source is immaterial. State law often allows private right of condemnation to convey water from source to place of use.

History: Originates in the customs of hardrock miners on the federal public land in California who recognized a better right in those that made earlier uses of water. Later adopted to regulate water allocation among agricultural users in the developing West. Doctrine incorporated into many state constitutions at statehood.

Administration: Most states have a state permitting agency, with a right to appeal any administrative decision to state district court. The “Colorado System” uses special water courts. Appeal from Colorado water courts is straight to the Colorado Supreme Court.

B. Riparian Doctrine.

Where: Eastern United States.

Basic Rule: Each landowner bordering a waterway has a right of reasonable use, and may not unreasonably interfere with reasonable uses made by other riparian landowners. In a time of shortage, all users must reduce use proportionately. Rights protected under tort/nuisance concepts.

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Ilistory: Llements of the doctrine are apparent in both the English Common Law and French Civil Law.

Administration: Generally subject to state permitting authority.

C. Hybrid Systems.

Where: California, Oregon, Washington, Hawaii, Midwest.

llislory: Started as riparian states, shifted to prior appropriation while still recognizing riparian rights and concepts to varying degrees.

Note that legislation limiting riparian rights in effort to switch to prior appropriation led to water rights takings suits in many states. See, e.g., In re Adjudication ofthe Water Rights of the L~pperGuadalupe Segment ofthe Guadalupe River Basin, 642 S.W.2d 438 (Tex. l982); Belle Fourche Irrigation Dist. v. Smiley, 176 N.W.2d 239 (S.D. 1970); los/in v. Mavin Municipal Water District, 429 P.2d 889 (Cal. 1967); Williams v. City of Wichita, 374 P.2d 578 (Kan. 1962); Bau,nann v. Smrha, 145 F. Supp. 617 (D. Kan. 1956); State cx re Emery v. Knapp, 207 P.2d 440 (Kan. 1949); C’al~fornia-Oregon Power Co. v. Beaver Portland C’ement (‘o., 73 F.2d 555 (9th Cir. 1934); In re Hood River, 227 P. 1065 (Or. 1924).

D. Federal Overlay.

1. Federal and Indian reserved water rights. Implied reservation of enough water to serve

primary purposes of any federal land reservation — recognized to varying degrees on Indian

Reservations, national parks, wilderness areas, military bases, etc. . . Many such claims remain unquantified. See e.g., Winters v. United States, 207 U.S. 564 (1908); Arizona v. California, 373 U.S. 546 (1963); UnitedStates v. New Mexico, 438 U.S. 696 (1978).

2. McCarran Amendment. Waives sovereign immunity and authorizes joinder of the United States in State judicial and administrative adjudication of water rights. 43 U.S.C. § 666.

3. Navigation servitude. Federal power over commerce and navigation may trump state based water rights without payment ofjust compensation. See Trelease, Federal State Relations in Water Law 175, National Water Comm’n Legal Study No.5(1971).

E. Contract Water Rights. Contracts for the use of water from projects developed by Federal or State agencies. Individual water users’ rights generally governed by express terms of the contract, but subject to the terms, conditions and implied limits of the underlying state law based water right for the project generally held in the name of the state or federal agency that developed the particular project. There has been substantial dispute and a significant body of case law on whether better title to the underlying state based water right rests with the United States or with the landowners/irrigators making beneficial use of federal project water. See e.g., Kiamath Irrigation District v. United States, 67 Fed.Ct. 504 (2005)(discussing and distinguishing competing lines of cases on the basis of the differences in contract language and state law).

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F. Groundwater. Unique animal. Sometimes subject to same rules as surface use, often the subject of particular statutes allocating use depending on such things as overlying land ownership and aquifer

characteristics. Colorado was a leader in “conjunctive management” - - recognizing hydrologic interconnection of ground and surface water. Other states still wrestling with how to integrate groundwater and surface use.

II. PHYSICAL DIFFERENCES MAKE THE PROPERTY MORE DIFFICULT TO DEFINE.

Takings law is complicated enough when applied in the land context — it becomes even more difficult when applied to a property interest in water. See, e.g., Tim/are Lake Basin Water Storage District v. United States, 49 Fed. Cl, 313, 319 (2001)(takings analysis applied to water rights presents “an admittedly unusual situation”).

A. Hydrologic Variability. Variable hydrograph during the course of every year. Significant difference between wet, dry and average years. Many streams in the arid Western United States are overappropriated, and in the late summer and fall, junior rights are often shut down. In a dry year, many junior rights may never be in priority.

• In Central Colorado Water Conservancy District v. Simpson, 877 P.2d 335 (Cob. 1994), the Colorado Supreme Court denied a taking claim at least in part because the alleged injury to junior rights caused by new legislation was too uncertain in light of the variable flows on the South Platte River. The “intermittent” nature of any potential injury to junior rights from the legislation did “not constitute a substantial diminution of the economic value of the affected rights.” Id. at 347.

B. Shared, Flowing Resource. Use and reuse are the rule. Each physical molecule of water in the South Platte is used up to seven times before the water reaches the Nebraska line. Most rights satisfied to some degree by return flows from various upstream uses. Return flow rates vary depending on the type of use and can be as high as 97% for winter time municipal use (i.e., 3% consumption for in-house uses) and as low as 20% for some highly consumptive agricultural uses (i.e., 80% consumption). A key component of the value of any water right is its historic consumptive use.

C. Imprecise Measuring and Accounting. “Many of the early Colorado decrees awarded rates of flow in excess of the amounts necessary for the petitioner’s beneficial use, and some even went so far as to grant more water than a particular ditch would carry.” Farmers, 975 P.2d at 198 (Cob. 1999). This is judicial recognition of the well known fact that there are many “paper water rights” in the West —judicial decrees and agency permits describing much more water than has been or even can be used forthe purported purposes.

III. ATTRIBUTES AND INHERENT LIMITS OF A WATER RIGHT IN A PRIOR APPROPRIATION STATE.

Application of the Lucas background principles. The Government can avoid paying compensation if regulation imposes limitations that “inhere in the title itself, in the restrictions that background principles of the State law of property and nuisance already place upon land ownership.” Lucas v. South Carolina Coastal Council, 505 U.S. 1003, 1029 (1992). In other words, “[w]here the State seeks to sustain

regulation that deprives land of all economically beneficial use, . . . it may resist compensation only ifthe logically antecedent inquiry into the nature of the owner’s estate shows that the proscribed use interests

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were not part of his title to begin with.” Id. at 1027.

l~heproperty interest in water in a prior appropriation state is subject to many significant “inherent limits” that must be considered in any takings analysis. Depending on the jurisdiction, the attributes of a water right set forth below may or may not be a “background principle” of state water law potentially asserted by the Government to diminish or defeat any claim for a taking.

A. Definition ofa Water Right Justice Hobbs in Santa Fe Trail Ranches Property Owners Association V. Simpson, 990 P.2d 46, 53 (Cob. 1999):

The property right we recognize as a Colorado water right is a right to use beneficially a specified amount of water, from the available supply of surface water or tributary groundwater, that can be captured, possessed, and controlled in priority under a decree, to the exclusion of all others not then in priority under a decreed water right.

B. Creation of Water Right: Three general requirements for creating a vested property right in a prior appropriation state: (I) intent to make an appropriation; (2) diversion or control of the water claimed; and (3) appropriation of the water to beneficial use. See Cob. River Water Conservation District v. Rocky Mm. Power Co., 406 P.2d 798, 799 (1965).

1. Diversion requirement. Colorado statutory definition — “Diversion” or “divert” means “removing water from its natural course or location or controlling water in its natural course or location, by means of a ditch, canal, flume, reservoir, bypass, pipeline, conduit, well, pump, or

other structure or device “ C.R.S. § 37-92-103(7).

• Traditional formulation required actual removal of water from the stream in some states. See e.g. Pabst v. Finmand, 211 P. 11, 15 (Cal. 1922).

• Current trend — States are beginning to recognize that the diversion element in prior appropriation law is better understood as requiring a degree of control over the water claimed sufficient to effect the desired beneficial use, rather than actual removal of the water from the stream. See e.g., State Dept. ofParks v. Idaho Dep ‘t of WaterAdmin., 530 P.2d 924, 928 (Idaho 1974)(”our constitution does not require actual physical diversion.”)

• Colorado: A diversion in the conventional sense, meaning removing water and carrying it away from the stream, is not required. See City of Thornton v. City of Fort Collins, 830 P.2d 915 (Cob. 1992); Genoa v. Westfall, 349 P.2d 370, 378 (Cob. 1960); See also, Larimer Co. v. Luthe, 9 P. 794 (1886); Thomas v. Guiraud, 6 Cob. 531 (1883) Gunnison.

• Recreational in-channel diversions — in stream control sufficient to satisfy statutory “diversion” requirement. Examples include boating courses in Golden, Buena Vista, Breckenridge, Vail, Salida, Steamboat and Gunnison. Procedures for appropriating and quantifying recreational in-channel diversion subsequently codified in Senate Bill 216 (2001) and Senate Bill 37 (2006).

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2. Beneficial use - ‘The use of that amount of water that is reasonable and appropriate under reasonably efficient practices to accomplish without waste the purpose for which the appropriation is lawfully made.” C.R.S. § 37-92-103(4).

In Colorado, what constitutes beneficial use is not limited, has evolved over time, and depends upon the circumstances in each case. State v. Southwestern Colorado Water Conservation Dist., 671 P.2d 1294 at 1322 (Cob. 1982).

• About 85% of water consumption in Colorado is by agriculture, 10% by municipal and industrial, 5% all other uses.

C. Right Acquired Is a Usufruct.

I. Only the right to use for beneficial purposes. Water itself is owned by the State:

The water of every natural stream, not heretofore appropriated, within the state of Colorado, is hereby declared to be the property of the public, and the same is dedicated to the use of the people of the state, subject to appropriation as hereinafter provided.

Cob. Const. Art. XVI, Sec. 5; See Farmers High Line Canal & Reservoir Co. v. City of Golden, 975 P.2d 189, 198 (Cob. 1999). Similar provisions appear in the constitutions or statutes of most Western States. See, e.g., Cal. Const. Art. 10, Sec. 2; Or. Rev. Stat. Sec. 537.110.

D. Actual Beneficial Use Is the Basis, Measure and Limit of a Water Right. Santa Fe Trail Ranches Property Owners Association v. Simpson, 990 P.2d 46, 53 (Cob. 1999). No person may appropriate more water than is necessary for beneficial use. Thomas v. Guiraud, 6 Cob. 530, 532 (1883).

E. Forfeiture and Abandonment— “Use it or lose it.” C.R.S. § 37-92-103(2), 402(11). The intent to abandon a water right may be inferred through the circumstances of a case, and need not be proved directly. See City & CountyofDenver v. Snake River Water Dist., 788 P.2d 772, 776 (Cob. 1990); Southeastern Cob. Water Conservancy Dist. v. Twin Lakes Assocs., 770 P.2d 1231, 1237 (Cob. 1989). Statutory requirements for forfeiture and abandonment vary by jurisdiction.

F. Are Low Value Uses Waste or Compensable Property?

I. California may not protect low value uses. In an often cited 1935 opinion, the California Supreme Court explained:

What is a beneficial use, of course, depends upon the facts and circumstances of each case. What may be a reasonable beneficial use, where water is present in excess of all needs, would not be a reasonable beneficial use in an area ofgreat scarcity and great need. What is a beneficial use at one time may, because of changed conditions, become a waste of water at a later time.

Tulare Irrigation Dist. v. Lindsay-Strathmore Irrigation Dist., 45 P.2d 972, 1007 (1935); See also ,Joslin v. Mavin Municipal Water District, 429 P.2d 889, 898 (Cal. I 967)(flow of stream

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carried in suspension rock, sand and gravel which were deposited on plaintiffs’ lands and

plaintiffs operated a rock and gravel business selling the deposits — “Since there was and is no property right in an unreasonable use, there has been no taking... the depravation is not compensable.”)

• Stockwater. In the Hage litigation, discussed in greater detail below, Judge Smith understood the United States to be arguing that the stockwater rights at issue had no value, and therefore that he should not even consider the case. He declined, and stated that valuation was a question for subsequent proceedings. Hage v. UnitedStates, 51 Fed.Cl. at 576.

• Colorado — No hierarchy of uses. Note that the apparent Colorado Constitutional preference for domestic uses in Art. XVI., Sec. 6, has been interpreted simply to mean that junior domestic water users can condemn the senior water rights of water decreed for other purposes ifthe domestic users pay just compensation. Town ofSterling v. Pawnee Ditch Extension Co., 94 P. 339 (Cob. 1908). Although the law in Colorado has continually expanded to recognize new uses as beneficial uses, it has not yet said that uses previously recognized as beneficial are no longer beneficial.

G. Never a Right to Waste — Diversion of water by itself cannot ripen into a water right ifthe water is not used beneficially. See Farmers’ High Line Canal & Reservoir Co. v. Southworth, 21 P. 1028, 1029 (1889). Every decree includes an implied limitation that diversions cannot exceed that which can be used beneficially. See Weibert v. Rothe Bros., 618 P.2d 1367, 1371 (1980).

II. No Right to Inefficent Means of Diversion — Unlined and leaky earthen ditches, inefficient water wheels and shallow wells, the norm in one era, wasteful in the next?

In City ofCoborado Springs v. Bender, 366 P.2d 552, 555 (Cob. 1961), the Colorado Supreme Court explained:

At his own point of diversion on a natural water course, each diverter must establish some reasonable means of effectuating his diversion. He is not entitled to command the whole or a substantial flow of the stream merely to facilitate his taking the fraction of the whole flow to which he is entitled.

j~,citing Schodde v. Twin Falls Land and Water, 224 U.S. 107 (1912)(system of water wheels required current to work properly. Downstream dam impounded water and destroyed the necessary current. The court held that an unreasonable and inefficient means of diversion could not interfere with reasonable use by others.)

2. Junior pays rule. In Bender, the Court explained that a junior appropriator may not divert water in a way that interferes with the right of a senior appropriator, but further explained that the conditions surrounding the diversion by the senior appropriator must be examined to determine whether they are “reasonably adequate for the use to which he has historically put the water of his appropriation.” Id. The court concluded that ifbetter diversion facilities would enable the senior to access a sufficient supply, such facilities could be required, but at the expense of the junior appropriators. Id. 3. Many state courts insist only that a senior have a reasonably efficient means of diversion, judged by standards applicable when the diversion was built. See, e.g., State cx. re. Crowbey v.

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District Court, 88 P.2d 23 (Mont. 1939).

4. California statement:

An appropriator cannot be compelled to divert according to the most scientific method known. He is entitled to make a reasonable use of the water according to the general custom of the locality, so long as the custom does not involve unnecessary waste.

Tulure Irrigation Dist. v. Lindsay-Strathmore Irrigation Dist., 45 P.2d 972, 997 (1935).

Right to Change— The right to change the place of use, the point of diversion, and the purpose of use is one of the sticks in the water right bundle.

I. Changes are made in Water Court, and are allowed only when accomplished (1) “by proper court decree,” (2) only for “the extent of use contemplated at the time of appropriation” and (3) “strictly limited to the extent of former actual usage.” Green v. Chaffee Ditch Co., 371 P.2d 775, 783 (1962).

2. Junior water right owners have a vested right in the stream regime that existed as of their appropriation date. Far,ners Highline Canal & Reservoir Co. v. City of Golden, 272 P.2d 629, 634 (Cob. 1954); Vogel v. Minnesota Canal and Reservoir Co., 107 P. 1108 (Cob. 1910).

3. Potential to preserve some economic value of a stockwatering right via a change to a place of use offof a federal grazing allotment has been cited as a potential reason to deny a takings claim. See Brief of Appellee United States in the Federal Circuit Court of Appeals in the Cobvin litigation discussed below.

J. Public Interest and Public Trust.

1. Most states direct the water permitting agency to reject or limit water rights applications that are not consistent with the public interest or public welfare, including the public’s interest in environmental protection. Where it exists, the public trust doctrine can be imposed to severely limit the right to divert existing water rights.NationalAudubon Soc ‘y v. Superior Court, 659 P.2d 709 (Cal. 1983)(limiting the City of Los Angeles’ right to divert from tributaries of Mono Lake because of the environmental impacts).

2. Public Trust doctrine has been rejected in Colorado. The right to appropriate guaranteed by the State constitution cannot be limited based on policy concerns not specifically grounded in statute. See Board of County Commissioners ofthe County ofArapahoe v. United States, 891 P.2d 952, 972 (Cob. 1995); see also, Aspen Wilderness Workshop v. Colorado Water Conservation Board, 901 P.2d 1251, 1263 (Cob. 1995); People v. Emmert, 597 P.2d 1025, 1027 (Cob. 1979) (rejecting the public trust doctrine as a basis for recognizing public recreational use of water over privately owned stream bed of non-navigable waterway).

K. Interstate Compact Obligations. An interstate water compact is “binding upon the citizens of each state and all water claimants.” Hinderlider v. La Plata River & Cherry Creek Ditch Co., 304 U.S.

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92, 106 (1938). Where state based rights exceed a state’s compact allocation, state based water rights may be curtailed without payment ofjust compensation. Id. at 102.

L. Unquantilied Federal and Indian Reserved Rights. Priority date of these rights is the date of reservation. Where they have not been quantified, they remain a cloud, and arguably an inherent limit on the value of anyjunior water right.

IV. Current Cases and Issues: Takings, Endangered Species and Stockwater.

A. Alleged Takings of Contract Water Rights in Reclamation Projects Under Endangered Species Act Regulation. Until very recently, claims that government regulation caused a compensable taking of a property interest in water have been largely unsuccessful.~As already scarce water supplies in the arid West have been further stretched by drought and greater demands from development, the tension between private water rights and the needs of water dependant endangered species, particularly West Coast salmon runs, have culminated in dramatic showdowns at the

headgate — and takings claims in the courts.

Tulare Lake Basin Water Storage District vs. UnitedStates, 49 Fed. CI. 313 (2001).

Facts: Plaintiffs were California water districts and water users with contract rights to water from the California State Water Project (“SWP”). By agreement with the United States Bureau of Reclamation (“BOR”), deliveries of water from the SWP were coordinated with operations under the BOR’s Central Valley Project (“CVP”).

In 1992, the National Marine Fisheries Service, pursuant to the Endangered Species Act, issued a biological opinion requiring modifications to the time and manner in which water could be pumped from the Sacramento-San Joaquin River Delta into the two projects. The limitations were imposed to protect the winter run Chinook Salmon and the Delta Smelt, two fish protected under the ESA. Similar limitation were imposed in 1993 and 1994. Plaintiffs allegedly lost over 350,000 acre-feet of water because of the restrictions.

The plaintiff water users brought suit in the Court of Claims asserting a Fifth Amendment taking of their right to use the contract water.

The United States argued the case on contract and regulatory takings grounds. It asserted no contract liability because the ESA regulation merely frustrated the purpose of the contract. The U.S. argued that the criteria for a regulatory taking—the existence of reasonable, investment backed expectations and of a significant decrease in economic value due to government regulation, were not met. The United States argued it should not be held liable because the alleged taking was no more restrictive than the “background principles” of California’s water rights law, which impose a limit on all water rights that they be reasonable and beneficial and not injurious to wildlife.

A summary of these largely unsuccessful takings claims is presented in Thompson,Forcing a Round Peg, supra n. 3 at 264-266.

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Plaintiffs urged the Court to use the physical taking analysis.

Holding: The court found a physical taking, citing Loretto v. Teleprompter Manhattan (‘A TV Corp., 458 U.S. 419 (1982). The Court rejected the United States invitation to use the balancing tests associated with a regulatory taking.

Analysis: Noting first that a water right is only a usufructaty right, and that plaintiffs’ sole entitlement was to the use of water, the Court explained that the physical taking analysis was more appropriate because, “unlike some other species of property where a use restriction may limit some, but not all of the incidents of ownership, the denial of a right to the use of water accomplishes a complete extinction of all value.” Id. at 319. The Court ruled that the Government had effectively substituted itself as the beneficiary of the water right with respect to that part of the contract water that was required to be left in the river for the fish. Id. at 3 19.

The United States argued the Court should draw a distinction between cases where the Government physically diverted water for its own use, and where it imposed a regulation that prevented a water right owner from using water. The Court was unpersuaded, noted that the impact was the same, and called the argument “a distinction without a difference.” Id. at 320.

On the public trust issue, the Court recognized that the background principles of California law impose public interest limitations on all water rights. It declined to consider whether the background principles of state public trust law, reasonable use, or nuisance law should have been invoked, however, and rested its decision on the fact that these principles had not in fact been invoked by state authorities to diminish the rights. id. at 323, 324.

Status: Two week trial on value in July 2002. Court determined quantity and value of water taken, and awarded damages, without calculating interest, of over $13 million. Court requested further briefing from the parties on calculation of interest rate. Tulare, 59 Fed. Cl. 246 (2003); see also Tulare, 61 Fed. Cl. 624 (2004)(further addressing the calculation of the interest rate).

United States settled the case prior to appeal for $16.7 million, despite intense lobbying urging the administration to appeal.

Rio Grande Silvery Minnow v. Keys, No. CV 99-1320, 2002 U.S. DisC. Lexis 9246 (D. N.M. 2002).

New Mexico Federal District Court granted injunction authorizing the Bureau of Reclamation to release project water for the benefit of the endangered silvery minnow. The Court commented “if BOR and FWS conclude that 2003 water deliveries to contractors must be reduced in order to avoid jeopardy to the silvery minnow, under the Court’s Order, the contractors must be compensated for the amount of contracted water not delivered to them.” Id. at 1235. The compensation issue was mooted because the climate improved, and no contract reductions were required. The Tenth Circuit later vacated its opinion affirming the District Court injunction. 355 F.3d 1215 ( th Cir. 2004). 10

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Kiatnath Irrigation District v. United Slates, 67 Fed. Ct. 504 (2005);

Facts: Irrigation Districts and individual landowners filed takings claim and breach of contract claim against the United States for reductions in water deliveries from BOR project. Water deliveries were withheld in 2001 pursuant to ESA enforcement, and a plan for operation of the federal project that left water in the river for the endangered fish.

Ibolding: No fifth amendment taking. Though Plaintiffs own property rights in the contract water deliveries, remedies lie in contract, not takings. I’he availability of contract remedies vitiates a takings claim, even if it is ultimately determined that there is no breach of contract. Id at 532. Tubare wrong and distinguishable. Court went on to opine that Plaintiffs faced an “uphill battle” in succeeding on contract remedies given: (1) “water shortage” provisions in contracts; and (2) sovereign acts doctrine, directing no contract liability where U.S. does not perform contract duties due to requirements of legislation of genera! applicability.2

Analysis: First question was to determine whether Plaintiffs held a property interest. Plaintiffs claimed their property interest in the water based on that part of Section 8 of the 1902 Reclamation Act stating that the right to use project water “shall be appurtent” to the land. Because irrigators owned the land, Plaintiffs argued they also owned the water under the Reclamation Act. Court rejected that argument on grounds that ownership was determined on state law grounds, and that under Oregon state law, all the water at issue had been allocated to the United States.3

Court determined that individual land owners were 3°party beneficiaries to contracts between irrigation districts and reclamation.4 Where contract remedies exist, the Court held, takings claim not available. Rationales for favoring contract remedies were present: (1) The U.S. acted in its proprietary capacity in entering contracts; (2) Plaintiffs retained full range of contract remedies.

Court cited the intense criticism of the Tn/are decision in numerous law review articles, and distinguished Tulare, saying Court there failed to consider (1) underlying project contracts and water shortage provisions; (2) underlying State doctrines limiting use of water to protect fish and the environment; and (3) that the Court failed to consider availability of contract remedies or applicability of sovereign acts doctrine.

The gravamen of the sovereign acts doctrine is to immunize the Government for unintentional breaches of contract caused by the passage of laws of general applicability,see, e.g., Centrex Corp. v. United States, 395 F.3d 1283, 1306-7 (Fed.Cir.2005), but not those laws specifically aimed at relieving the Government of contractual liability, see, e.g., United States v. Winstar, 518 U.S. 839, 895, 116 S.Ct. 2432, 135 L.Ed.2d 964 (1996).

3Court noted factually limited nature of this holding: “any attempt to extrapolate the reclamation water rights owned by an individual in one state from cases involving the laws of another state is perilous.” Id. at 521.

4The Court of Claims distinguished the Supreme Court’sQ~decision, 125 S.Ct. 2606, on the ground that the at’firmation there was not of the Ninth Circuit’s finding that there was no third party beneficiary status, but on the ground that there was no waiver of sovereign immunity.

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Subsequent Treatment: Federal Court of Claims declined to certify Kiamath for appeal, finding that the earlier Tubare decision was distinguishable on its facts and did not represent a “substantial ground for difference of opinion” sufficient to certify the case. Kiamath, 69 Fed. Cl. 160 (2005).

Orff vs. United States, 125 S.Ct. 2006 (June 23, 2005).

Reduced water deliveries from Reclamation Project to meet needs of endangered fish, Plaintiffs were individual irrigators and other entities that received water from irrigation district. Irrigation district had contract with BOR. Federal District Court held irrigators not 3°party beneficiaries,

Ninth Circuit affirmed. Supreme Court affirmed on different ground - no waiver of sovereign immunity in Reclamation statutes.

Stockton East Water District vs. United States, 2006 WL 932374 (Fed. Cl. 2006)(Judge Miller)

California municipal water providers alleged taking and breach of contract for reductions in deliveries of Reclamation project water. Parties argued the competing Ninth Circuit and Federal

Circuit law on irrigators 3°party beneficiary status on summaryjudgment motions — Ninth Circuit authority holding irrigators not 3°party beneficiaries, Federal Circuit finding such status should be recognized.5 Court denied motions, determining that facts relevant to 3°party beneficiary status were in dispute and must be resolved at trial.

B. Water Right Takings Alleged Pursuant to Federal Land Management — Grazing and Right of Way Permits.

Hage v. United States, 51 Fed. Cl. 570 (2002).

Facts: Nevada ranch owner brought claims arising out of BLM’s cancellation of grazing permits for the use of federal land, arguing, among other things, that cancellation denied access to privately owned stockwater rights on BLM land and constituted a taking.

Status: Proceedings to date have only determined that plaintiffs have vested property interests in stockwater and ditch rights on federal land. Federal Court of Claims rejected requests by the United States and the State of Nevada that it dismiss or stay the case until Nevada adjudicated the water rights claimed by the ranchers. The court determined that the plaintiffs had a number of vested water rights, and that plaintiffs might be entitled to compensation if they could demonstrate (1) a beneficial use of the water prior to the government revoking their grazing permits, and (2) that there was a taking of the plaintiffs’ right to use their vested water rights. Id. at 592.

Court also appears to have adopted, without much discussion, the physical taking analysis used in Tulare. Id. at 576.

Fifteen years after the 1991 filing ofthese claims, this case is still pending in the Federal Court of Claims.

5 Ninth Circuit, see e.g. Orffv. United States, 358 F.3d 1137 (9tl~Cir. 2004); Klamath v. Patterson, 204 F.3d 1206 ( th Cir. 1999). Federal Circuit, see e.g., HF. Allen Orchards v. United States, 749 F.2d 1571 (1984). 9

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Washoe county, Nevada v. UnitedStates, 319 F.3d 1320 (Fed. Cir. 2003).

Facts: Washoe County received permission from the Nevada State Engineer to change the place and purpose of use of irrigation water historically used on a Nevada Ranch so that the water could be sold to the Reno-Sparks area for municipal and industrial purposes. The only feasible method to transport the water was by pipeline over federal land. The BLM refused to grant a right-of-way permit over federal land for the necessary pipeline. Washoe County filed in the Court of Federal Claims alleging that the denial of the right of way permit was a taking of their water rights. The Court of Claims denied the taking claim on summaty judgment.

lbolding: Affirmed. No taking.

Analysis: Citing Tn/are and other cases, the Court explained that a physical taking of a water right may occur where the government has physically diverted water for its own consumptive use or decreased the amount of water accessible by the owner of the water rights.

Noting it was ~ bound by the lower court Tn/are decision, the Federal Circuit r.:~ed there was no physical taking because “the government has neither physically diverted or appropriated any water nor physically reduced the quantity of water that is available to the Appellants from the water source on the Ranch.” The Court noted that water was still available for use by the Ranch for its historic purposes. Id. at 1327,

No regulatory taking because government was not regulating the water rights, but the use and occupancy of its own federal land. “Government was acting as a landowner whose neighbor sought permission to lay a pipeline across its property.” Id. at 1327-1328.

Okanogan county p. National Marine Fisheries, 347 F3d 1081 (9th Cir. 2003), cert denied, 541 U.S. 1029 (2004).

Washington State irrigators relied on diversion facilities and ditches located in the Okanogan National Forest. As a condition of renewing special use permits for the ditches, the Forest Service required reduced diversions from the Chewuch River to maintain instream flows for endangered fish. The District Court found that the special use permit condition was within the authority of the Forest Service. The Ninth Circuit affirmed, drawing a distinction between the plaintiffs’ state based water rights and the Forest Service’s land management authority. Quoting the Supreme Court’s 1917 Utah Power and Light Co. decision, the Court explained the case “is not a controversy over water rights, but over rights-of-way through lands of the United States, which is a different matter, and is so treated in the rights-ofway acts before mentioned.” Okanogan, 347 F.3d at 1086.

Go/yin Cattle Co. v. UnitedStates, 67 Fed. Cl. 568 (2005):

Similar facts to Hage. Nevada Rancher, relying in large part on Hage, claimed the United States took water rights and ranching operation by cancelling grazing permits. Alleged taking of stockwater rights on public land based on claim that by canceling grazing permit, BLM denied access necessary to use water. Rancher also claimed a taking based on BLM’s lease of allotment to a different rancher, and that drinking by wild horses and burros was a taking by the United States of the rancher’s state based water rights.

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Court of Claims denied takings claim and dismissed the case on summaryjudgment.

In the pending appeal in the Federal Circuit Court of Appeals, United States argues its right to cancel grazing permit on federal land is a well established “background principle” of the right to use the range and cannot be the basis for taking the water right. United States also argues that wild horses and burros are not instrumentalities of the United States and their use of water cannot constitute a taking by the government.

Other recent cases concerning claimed taking of stockwater rights where the United States cancelled grazing permit on federal public land include Kiunip v. United States, 30 Fed,Appx. 958 (Fed. Cir. 2002)(no taking based on allocation of stockwater right to the United States, and not the ranch, under Arizona law); Diamond Bar cattle C’o. v. United States, 168 F.3d 1209 (1 th Cir. 0 1999)(discussing New Mexico law on water rights, and concluding rancher’s water rights do not give a vested forage right on federal land); Walker v. United States, 69 Fed. CI. 222(2005)(questioning Diamond Bar, and requesting guidance from the New Mexico Supreme Court concerning whether a vested New Mexico stockwater right includes an implicit right to graze); andSacramento Grazing Association v. United States, 66 Fed. Cl. 211 (2005)(granting United States’ motion to dismiss claim for alleged taking of a grazing right, but granting leave to amend complaint for a more definite statement concerning the alleged taking of stockwater rights.)

VI. Current Debate and Unresolved Issues.

A. Can Background Principles Be Invoked for the First Time in the Taking Case, or Must the State Have Previously Acted to Reduce the State Based Property Right?

I. One criticism of the Tulare decision is that Judge Weise deferred to the paper permits and delivery contracts in evaluating the ownership and extent of the water rights, and failed to incorporate California state law background principles on waste, reasonable use, and public interest environmental protection that are arguably inherent, self-executing limits on every water right in California. See Gray, Takings and Water Rights, supra n. 3 at 23-17 to 23-21. The rationale in Tulare was that imposition of these limits on California water rights requires a balancing of policy factors that was best left to the state water agency. Where the State of California had declined to act in the past, the Court declined to impose its judgment. Tulare, 49 Fed. Cl. at 324 (2001).

2. Compare the Tn/are approach with Judge Smith’s decision in Hage where he declined to allow the State of Nevada to first adjudicate the extent ofthe alleged stockwater rights at issue, and instead defined those state based property rights for the first time in the Federal Court of Claims. Hage, 51 Fed. Cl. at 575 (2002).

3. The Colorado Supreme Court has held that the implied limits on waste and beneficial use are automatically read into every decree. See Weibert v. Rothe Bros., 618 P.2d 1367, 1371 (1980).

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14. I~volvingBackground Principles on Beneficial Use, Waste, Reasonable Diversion and Public Trust.

I. The Lucas decision directs that the relevant “background principles” of state property law are to be determined by a historic inquiry. The contrast is between uses of property that were “previously permissible under relevant property and nuisance principles” and uses that were “always unlawful.” Lucas, 505 U.S. at 1029-30.

2. The most interesting, and most controversial problem, is that some of the essential “background principles” of water law that are set forth above such as beneficial use, waste, efficiency of diversion, and public trust, openly anticipate changes that may diminish or abolish the property interest. In other words, some of the background principles defining water in at least some jurisdictions dictate that the scope of a right may change in response to changing public values,o

3. Note again that Tn/are refused to incorporate the background principles of California water law.

4. Debate seems to be on how much room there is for the background principles on beneficial use, waste, efficiency and public trust to evolve. Even property rights advocates who assert that the “background principles” are “static, non-legislative, unchanging, rigid, frozen and historically bounded,” admit there is at least an argument that water rights “have always been limited by contemporary ideas about what uses for water are reasonable.”7

5. Rule of “reasonable” beneficial use, and “reasonable” efficiency will always require an ad hoc analysis, and a factual inquiry into local custom and changing technology and economies. Shallow wells, unlined, leaking ditches, flood irrigation, and low value uses may all be reasonable in onejurisdiction or community, at one time or another, but not in the next jurisdiction or at a later date.

C. Physical Taking or Regulatory Taking — Is Fact Based Balancing of Interests Ever Appropriate When the Taking Claim is Based on a Regulation that Limits Right to Use a Usufruct?

1. In the Tulare decision, the Federal Court of Claims rejected the United States assertion that the Court should use the fact based regulatory takings balancing analysis. The Court instead found a physical taking, analogizing to earlier cases where the government diverted water at a dam upstream for public purposes, depriving downstream plaintiffs of their historic use, and where the government diverted water away from a mill for use in government power production. Tulare, 49 Fed. Cl. at 319, citing Dugan v. Rank, 372 U.S. 609 (1963); Int’l Paper Co. v. United States, 282 U.S. 399 (1931). The rationale seems to be that with a usufructory property right, regulation that diminishes the right to use is a complete physical taking of at least that fraction.

5 See Joseph Sax, Rights that Inhere in the Title Itself”: The Impact ofthe Lucas Case on Western Water

Law, 26 Loy.L.A.Rev. 943 (1993).

7Hacidock, Constitutional Limits, supra n. 2 at 5, 7.

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2. Are there any examples of a fact based regulatory takings balancing analysis applied to water? See generally Central Colorado Water Conservancy District v. Simpson, 877 P.2d 335 (Cob. 1994). Should there be more’?

D. Reductions in Reclamation Project Water for Endangered Species or Other Purposes — Contract Action or Takings Claim?

I. After Kiamath, is there room to argue taking of contract water, or are remedies limited to those that sound in contract?

2. Key to the Court’s refusal to consider takings analysis in the Federal Court of Claim’s 2005 Kiamath decision was the availability of contract remedies. Those contract remedies are not available to irrigators denied 3~party beneficiary status in the Ninth Circuit under Orff, and Klamath v. Patterson, 204 F.3d 1206 ( th Cir. 1999)— does this then bring us full circle back to 9 the Tulare analysis?

3. Continuing uncertainty in how title is held to Reclamation Project water complicates the takings analysis. Is better title to project water in the irrigators/beneficial users, or in the United States? Kiamath suggests it will always be an ad hoc determination based on

underlying state law and terms of particular project contracts — “any attempt to extrapolate the reclamation water rights owned by an individual in one state from cases involving the laws of another state is perilous.” Klamath Irrigation District v. United States, 67 Fed. Ct. 504 at 521 (2005).

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